車美仕 (KMX) 2008 Q4 法說會逐字稿

Good morning, I'll be your conference Operator today.

At this time I'd like to welcome everyone to the fourth quarter earnings conference call.

All lines have been place 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 again your conference.

Good morning, my name is Katharine Kenny.

I want to thank you for joining us this morning.

On the call today are Tom Folliard, our President and Chief Executive Officer; Keith Browning, our Executive Vice President and Chief Financial Officer; and Tom Reedy, our Vice President and Treasurer.

Before we begin, let me give you sort of a brief update on where we will be appearing.

This is my little commercial.

I will be in New York next week and at the end of the month, and I'll also be with management in Chicago in April and in California and Boston in May.

We also have our usual Analyst Days that we do every month, May, June, and July.

Before we begin 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 managements current knowledge and assumptions about the future events, that involve risks and uncertainties that could cause actual results to differ materially from our expectations.

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please see the Company's annual report on Form 10-K for the fiscal year ended February 28, 2007, which will soon be out of date, filed with the SEC in our subsequent filings.

Now I'll turn the call over to Tom.

Thank you, Katherine, good morning, everyone.

Thanks for joining us.

Well, as you saw in this mornings press release, CarMax just concluded a very challenging year, and a disappointing fourth quarter from an earnings perspective.

However, most of the earnings shortfall came as a result of the turbulence and illiquidity in the global credit market especially for asset backed securities.

Keith will describe the resulting valuation adjustments and increased funding cost reported in a few minutes.

The good news though was we reported 3% used unit comps for the fourth quarter and the full year, above our most recent expectations and at the low end of the original guidance that we shared at the beginning of this fiscal year.

Our ongoing belief is that CarMax will consistently outperform the competition in a variety of economic environments primarily due to the unique aspects of our model.

Our data continues to indicate that we are gaining market share.

Now let me review a few of our key financial results.

First sales.

In the fourth quarter total sales increased 9% to $2 billion compared with $1.9 billion in the fourth quarter of fiscal '07.

For the full year total sales increased 10% to $8.2 billion from $7.5 billion last year.

We opened three stores in the fourth quarter for a total of 12 during the fiscal year representing a 16% expansion over last year.

At the close of fiscal '08 we operated 89 stores.

Used vehicle revenues increased 11% for the quarter due to a 13% increase in unit sales and a 2% decrease in average selling price.

The decrease in average selling price was primarily due to a mix shift as consumers focus on older, more affordable vehicles and smaller more fuel efficient ones.

During the fourth quarter we saw increases in traffic in both the stores and on CarMax.Com as compared to last year's fourth quarter and execution in our stores also improved.

In fiscal '08 we sold more than 377,000 used vehicles, a 12% increase over 2007.

Wholesale revenues remain flat during the quarter as a 1% increase in unit sales was offset by a slight decrease in the average selling price, wholesale units grew less than retail sales primarily due to a lower appraisal buy rate.

For the fiscal year we sold more than 222,000 vehicles at our auctions, an increase of 6% compared with last year.

As for gross profit in the fourth quarter our total gross profit per unit decreased by $120 due largely to a decline in gross profit per used unit.

A trade off we were willing to make in order to support unit sales in a period of weaker demand.

Nevertheless wholesale profit per unit increased slightly due in part to strong attendance at our auctions.

Total gross profit per unit for the full year was flat compared to fiscal '07.

Now on to CarMax Auto Finance and I'm going to turn it over to Keith and he will review those results.

Thanks, Tom.

For Tom's earlier remarks, CAF had a very tough quarter.

Many of the charges we took in the quarter related to things beyond our control, items related to the ongoing turmoil in the global credit markets.

In total, CAF income was reduced by $34.6 million or $0.10 per share, and reported a $1 million loss for the quarter.

I'll briefly review the three most significant items that contributed to that loss.

First, the discount rate.

Each quarter, we evaluate the appropriateness of the key assumptions to our gain on sale model.

Prior to the third quarter of fiscal 2008, most of our retained interest adjustments had been confined to prepayment speeds and loss rates.

Recently we've also been impacted by volatility in funding costs.

Historically the assumption we've used for discount rate has been 12%.

We increased this discount rate to 17% this quarter reflecting the dramatic increase in market-rates for investments in similar financial instruments.

This change resulted in a non-cash charge of 14.7 million which included an adjustment to our reported gain percentage in the fourth quarter.

Remember that this change should impact the timing of future income recognition, not the amount of that income.

It essentially results in less income this year and more in future periods assuming that nothing else changes.

The second major adjustment was loss assumptions.

We increased our cumulative loss rate assumptions to 2.9 or 3% for the four most recent public securitizations.

We also increased the loss assumption on receivables in our warehouse facility.

These loss adjustments totaled $8.7 million.

As we've discussed previously we feel comfortable with our current credit standards but we acknowledge that our losses are running somewhat higher than are originally projected due to the stress of the current economic environment.

We view this as a temporary cycle that has affected most financial institutions and is not unique to CarMax.

We continue to regularly monitor losses and have tightened some standards at the lower end of the range we buy and more recently we've increased down payments for these customers at that lower end which oftentimes results in a sale financed by one of our third party lenders instead of CAF.

Thirdly our funding cost increase as expected and as we discussed in our third quarter conference call we recorded a charge of 6.1 million due to the higher funding costs for our 2008-1 public securitization in January.

Now I'll turn the call back over to Tom.

Tom?

Thank you, Keith.

I'll talk about SG&A for a second.

The SG&A ratio in the fourth quarter was 10.8% compared to 10.7% in the fourth quarter of last year.

Last year included a $4.9 million impairment charge.

Net income decreased $22 million or $0.10 per share from $42.1 million or $0.19 in last year's fourth quarter.

For the year, net income decreased to $182 million or $0.83 a share from $198 million or $0.92 a share last year.

Now, looking forward.

Our annual store growth plan of approximately 15% remains solidly in place during fiscal '09, we expect to open 14 stores including seven production and seven non-production stores.

Nine will be opened in new markets for CarMax.

These include several larger markets, Phoenix and Philadelphia.

While our plans are always subject to change we currently expect to open nine stores in the first half of the fiscal year.

The uncertainty of current market conditions in both the used vehicle marketplace and global credit markets mandates that we take a more conservative approach to our range of projections for fiscal '09.

We therefore project used unit comps in the range of negative 2 to a positive 5%.

Total revenue growth between 7 and 14%, and earnings per share of $0.78 to $0.94.

We expect to be able to deliver flat gross profit for used and wholesale units in fiscal '09.

We don't expect a significant decline in credit availability to our customers despite the fact that Americredit will no longer be originating loans for us effective yesterday.

Recently Americredit had originated only about 1% of our loans and we anticipate the majority of these loans will be picked up by other third party lenders.

We've been reassured by our remaining third party lenders that CarMax is an important part of their strategic business plans and we do not expect any noticeable impact results resulting from their need to tighten lending standards outside of CarMax.

Our other lenders continue to tell us they prefer our loans which generally perform better than those of other dealers even in this stressed economy.

We also regularly talk to and test additional lenders.

While we continue to believe there will be a market at a price to fund CAF, we clearly expect it to remain expensive relative to historic norms due to the current market disruption.

Based on current spreads in the market place we anticipate that CAF will absorb approximately $14 million in incremental funding cost when we refinance loans residing in our warehouse facility at year-end, which approximates, which is approximately $855 million.

We also expect to see a continuation of the effects of economic stress on our originations, resulting in loss rates similar to the higher levels we saw in fiscal '08 which will also impact CAF earnings in fiscal '09.

While we will continue to look for opportunities to improve our credit underwriting at this point, I would describe it as just fine tuning.

We do not anticipate making any significant changes to CAFs current underwriting standards.

Lastly, at projected comp levels we would expect SG&A deleverage in fiscal '09 especially as we plan to continue to spend on growth and selected strategic initiatives.

Since we expect debt levels to grow we also project higher interest expense.

Despite a difficult fiscal '08 and a challenging fiscal '09 we remain confident in the strength of the CarMax model and the ability of our associates to successfully help us achieve our long term goals.

We believe that CAF is a key competitive advantage that helps us provide higher value to customers and to our shareholders.

CAF is more profitable even in extremely difficult environments like fiscal '08.

The average profit we recorded per vehicle financed by CAF in fiscal '08 was roughly $600 still significantly higher than the average fee we receive from our other lenders.

It is in fact for just this kind of environment that we originally conceived of CAF.

Before I close and take your questions let me take a moment to thank the nearly 16,000 dedicated CarMax associates for all they do every day, to help us achieve our short and long term goals.

Now we'll be happy to happy to take.

Your first question comes from the line of Matt Fassler with Goldman Sachs.

Thanks a lot and good morning to you.

Good morning.

A couple of questions if we could.

First of all, on the gross margin side and your strategy of taking a lower gross profit per vehicle, is it, how do you think that worked out for you?

It's a bit of a departure from how you had come at the business prior to this quarter.

Were you satisfied with the results and is it something that you would expect to continue to pursue in 2008?

Well, in fiscal '09, Matt, you saw we expect to be able to run flat margins year-over-year, so we believe that our projection for comp sales reflects our ability to be able to deliver that and deliver in that range of comps.

In terms of the strategy for the -- for moving margins to move sales I talked about it at the end of the second quarter and that was at a time when we didn't believe it would have had much of an impact and as things continued along the way they did over the next several months, we thought it made sense to try and help spur sales a little bit with slightly lower margins, and how did it work out is very difficult to say.

We're pleased with our sales results for the quarter.

How much of that can can we directly attribute to the lower margins is very difficult to say.

Got you.

Second question, a couple questions actually on credit.

To the extent that you took the discount rate up to 17% from 12%, if you could just give us a sense as to the thinking behind that and whether that covers prospective securitizations?

I don't believe it does, and what the implications of that higher discount rate are for the gain on sale ratio going forward?

Well, the discount rate covers everything that we have, obviously financed so far.

So I can tell you that our forecast for next year does include anticipation of a higher discount rate at similar levels.

So we don't see the stress caused by the global credit market changing dramatically next year, and so it contemplates that we're going to see discount rates at that similar level, and the thinking was is just generally that we saw credit spreads dramatically rise.

If you go back to the, since the end of the third quarter, we've seen them rise over 200 basis points and it was hard to stand on our old discount rate of 12% given that dramatic increase which is really unprecedented in our history.

Now, does your, you guided to gain on sale percentage significantly below the 3.5 to 4.5% range or well below, I think you said, the 3.5 to 4.5% range, does that include the $14 million item that you disclosed in your guidance for fiscal '09 or is it incremental to that?

Sure, it includes that.

Is if you were to back that out, would you still be below the 3.5% threshold?

The answer is I really don't know off the top of my head but I would tell you that we have a very wide range there on our earnings estimate really related to the uncertainty of what our cost of funds are going to be, and so even backing that out if we achieve that I don't know and what the Fed is going to do and its impact on us I don't know.

It's part of the reason why we have a much wider range on next year's earnings is the ongoing uncertainty with what our funding costs are going to be.

Got you.

Just my final question.

There is a piece of your sales pie that you do outsource, if you will, to third party vendors.

Some of that I guess relates to subprime customers.

How big a piece of the business is that right now, and kind of how much has that changed and what happens to it going forward in your forecast?

Well, in the fourth quarter, we had a nice increase from our true subprime provider.

It actually probably contributed about 1% of our overall sales increase year-over-year, but on an ongoing basis we don't expect any substantive changes.

And remind us who that provider is?

Drive.

How big a piece of the business has that become for you?

Well, for the quarter, it was slightly less than 2%.

It always has its eco-seasonality in the fourth quarter associated with income tax refunds and that's why it goes dramatically and it will be on average less than 1% for the year.

So that's the true-true subprime customer?

True, right.

Got you.

That small percentage of sales is at a lower average profitability as well so even if that whole amount of sales went away that amount of profitability wouldn't go away.

Got you.

Thank you very much.

Thank you, Matt.

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

Good morning.

Hi, Sharon.

I have a few questions on retail and a few questions on finance.

So first on retail.

I guess I'm a little confused on the gross profit tightening in the fourth quarter because I know that velocity picked up obviously in your comp but then it sounds as if you're projecting similar gross profit per vehicle in '09 which kind of implies to me your feedback on the test or the experiment was a little bit mixed in the fourth quarter.

So can can you kind of talk through, Tom, what you saw, I know Matt asked the same question but maybe in a little bit more detail.

I know you have tremendous analytics, so is there enough stimulation that you can have on demand if you drive down that gross profit to pick up sales or is it truly just a wash at this point?

One of the problems is it's really difficult to figure out exactly what you've got for that money.

Would we have gotten those same sales without the margin decrease?

Probably not.

I can't tell you how many percentage points of sales we picked up.

It's just when we tried to forecast all of next year, assuming some movement in margin throughout the year and some change in sales and looking at our projected comps we feel pretty good about our ability to be flat at the end of the year.

There's obviously going to be some movement throughout the year just like there was this year.

It's just when we look at the comp range that we set and our margin expectation, we think we can deliver flat margins.

So as we sit here today are you still, do you still have somewhat tighter margins targeted on the lots?

I'm sorry say that again?

As we sit here today are you still targeting somewhat tighter margins on the lots in the first quarter, for example?

I don't mean to pin you down on quarterly guidance.

I'm just trying to figure out strategically, whether what you did in the fourth quarter has continued into the first quarter.

Well, I'm not going to talk about the quarter but I'll tell you that we looked at the year, we looked at our ending place at the end of the fourth quarter and where we were on margins and we looked at our ability to manage through the next 12 months and we think at the end of the year we'll be flat.

Okay.

I guess separately, on the inventory expansion test, which you brought up of course for the third quarter, can you you kind of give us an update on how many stores that's in and what you're seeing in those stores and how that might impact this year?

It's right now, it's in roughly a third of our stores.

We are in the early stages pretty pleased with the results.

We will probably expand it some here in the beginning of the year, but really we want to read results on something like that for a much longer period of time than just three or four months and we want to see it run through some different economic situations as well.

So we're pretty pleased with it.

Again this is not the kind of thing where you can specifically attribute X number of percentage points to the inventory up test, but we're pretty pleased with the results.

Okay.

And one other point to make, Sharon, is we had one set of stores that we tested inventory up in in the fourth quarter.

We had the majority of our stores did not have inventory up and sales on average were up in both groups.

Okay.

Separately for Keith, are you going to the asset backed market in April?

Is that still the plan?

Well, we'll do our next financing in the first quarter.

Whether it's in the asset back market or takes other shapes, we're still working on it.

In terms of the tighter credit standards, CAF, do you have any idea how much market share you're likely to give up in CAF to your third party lenders this year?

It won't be significant.

I mean, we did most of that adjustment at the end of the third quarter and the good news is we don't think we saw any sales loss and didn't see a significant market shift but there was some, but less than 1%.

Okay and then just lastly on Americredit, did I hear correctly that AmeriCredit only generates about 1% of your loans because I thought it was much higher than that.

Well, that was more recently and obviously even much less than that if you went down to what you would call unique or incremental and that doesn't even count that we have two layers below them that obviously would likely buy most of those if not all of them.

So if we looked at the, well, that's fine, okay, thanks.

Thanks, Sharon.

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

Good morning.

Good morning, Seth.

Can I ask you a couple questions on CAF and then a couple on the business?

First on the plans for April, Keith you mentioned doing some sort of financing.

Are you considering something else besides the ABS market, and what's going to to determine where you go?

Yes, I mean, we've been talking about exploring a couple alternatives to the ABS market, and because we're in April and we're going to do something in the first quarter, it's just not a period where we can really talk more broadly about that, but we are exploring our options.

Okay.

You didn't specify if you expected an increasing cost of funding in the warehouse facility in 2008, particularly as that facility renews in July.

Is that anticipating your guidance?

Well, quite honestly, at the end of the day, our alternate cost as a public market or whatever form we choose, so it's implicit in there in the fact that that's step one of our pricing and then step two is to go ahead and refinance loans out of the warehouse, so I think it will be higher but it won't have any impact on our guidance because the ultimate cost is what we're paying in the public market or other markets that we choose.

Okay.

And then just as you think about where you want to finance these loans, do you still consider yourself to be a prime lender as some of your loss rates push up against 3% and if they move above 3% what does that imply for spreads going forward?

Yes.

We absolutely believe that we are still a prime lender and believe we can tap the ABS market should we choose to do so.

What it may affect is really there may be a change in enhancements if we linger slightly North of the 3%, but because this is affecting the market more broadly, we believe the rating agencies and investors all will consider that and feel comfortable with the prime rating.

Okay.

And then just turning to the business on the wholesale side, can you talk about why the buy rate declined and whether that was planned and whether you expect that to continue going forward on the wholesale side?

Well, I talked about the buy rate decline at the end of the third quarter and we thought that that had a lot to do with just consumer uncertainty, the economic environment, along with the impact it had on our sales.

This quarter, you saw our sales were stronger than we expected but our buy rate continued to lag, and just to be honest with you we don't know exactly why that is.

I think there's a number of factors that could contribute to it.

We've been talking about negative equity for a long time and maybe that's starting to catch up a little bit but I couldn't attribute any specific number of points to that.

There is a difference in wholesale depreciation this year that we haven't seen in a little while that maybe also is contributing and I still think that consumer uncertainty piece is in there as well.

And whether or not that will continue, it's very difficult for us to forecast that, but our expectation is that we can at least maintain where it is right now and possibly build some time during the year.

Fair enough and then lastly on the guidance for costs for 2008, I know you don't like to give quarterly guidance but how do you think about the cadence of that comp run rate throughout the year?

Do you expect it to be back half weighted?

You said it right the first time about not giving the quarterly guidance.

You can look at our, it's just not an easy thing to predict on a quarter to quarter basis and you can look at the way that the cadence has gone in the past and you can't make any sense out of it.

We had 13 and 12 in the third and fourth quarter last year and then this year you saw what they were for the two quarters and it's just very difficult to figure out for the year so we would rather stick to the guidance for the year and be able to hit it.

Got you.

Thanks a lot, guys.

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

Hi, Rex.

I think the CarMax Auto Finance questions have been explored in some detail.

I wanted to ask a little bit about profitability and gross margin, return to that topic.

You said that the mix shift has gone towards older and lower priced vehicles and I'm wondering how much of the gross profit per vehicle impact in this quarter was a result of that shift and how much of it was discretionary and what you're expecting going forward, any continued impact in that mix shift and what it means?

I could tell you that none of it was a result of the mix shift, and all of it was discretionary.

Okay.

So any expected projection on the mix shift going forward , we don't manage -- our margins don't flow based on that mix.

They don't flow based on whether it's a fuel efficient car, an SUV.

We don't have -- we have a variety of margin targets within each of those segments and the factors that contribute to those margin targets are unrelated to whether or not it's a fuel efficient car or a sport

I guess there isn't -- I have a question on the portfolio and that is in taking the discount rate from 12% to 17%, how much of an EPS impact is that, if you could just isolate that change, what is the EPS impact on your FY 2009 guidance?

Didn't calculate it on 2009.

Obviously it was $0.04 for this year, but I'd have to go calculate that.

But it would be somewhere in that same range?

It's included in there.

It's in our expectations, Rex.

It was 14.7 million for fiscal '08.

14.7 million in this quarter, on the EPS line, for this quarter, I'm wondering what the impact is going forward.

We'll have to get back to you on that.

Okay, all right, thank you very much.

Thank you.

Your next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

Good morning, guys, how are you?

Hi, how are you, Scott?

All right.

I know you guys don't want to talk about necessarily the cadence of the quarter itself but Tom, you do make a comment in the press release that sales were stronger than expected at the beginning of the quarter and what I'm trying to figure out is does that imply a slowdown as the quarter progressed or were you already expecting some sort of ramp and it just kind of got back to expectations as the quarter kind of progressed there?

No.

What it really meant was at the beginning of the quarter, was when we announced the third quarter, so when we set our expectations for the fourth quarter, we're just, we're not referring to the timing of sales in the quarter.

We're referring to when we gave the guidance.

Okay.

We gave the guidance at the beginning of the quarter, a couple weeks in after the end of the third quarter and so from that point forward, sales were stronger than we expected.

Okay.

That's helpful.

And then Keith, could you remind us how long your $300 million extension exists on the warehouse facility and what is the plan for that going forward, could you actually expand that further?

I know you said it's an expensive extension, that's not something you were necessarily shooting for so an you just give us a game plan on that?

Well, it expires at the end of this month on April 30, and as I indicated earlier, really what we're in the midst of is looking at the other alternatives.

We believe that we could expand that again if necessary, but it will depend on the timing of our next transaction on whether we have a need to do so or not.

I know you guys are still in exploratory mode but what is the most likely alternative?

Is it doing whole loan sales or are there other things that maybe we aren't considering?

Again, we said whole loan sale is a possible alternative and there's another one or two that we're considering just outside of the ABS market.

Just really don't want to be more specific than that since we are in the midst of discussions and negotiations.

Fair enough.

And then the last question is, Tom you referenced you are expecting flat margins in terms of gross profit dollars per unit in the wholesale business and I guess my question is if we were under more normal circumstances, whatever that may actually be, let's just call it a better overall sales environment, would you expect any material change going forward in that gross profit dollars per unit or are we kind of, where do you expect to be and what you think is kind of a sustainable rate at this point?

We hope that this is a sustainable rate so we're not aggressively trying to move that margin up but as I talked about before it's an integrated piece with all of the other parts, with retail sales, with CarMax Auto Finance with Value Max and we're managing the total margin on a per used unit basis that we can deliver to the shareholders not each of those individual components by themself because as I've is said before you really just can't do that.

It has too much of an impact on other areas.

If we were in a better environment I would have expected to had more units that we sold.

Right.

Okay, but so the gross profit dollars that's kind of what we've achieved the target and that's kind of what you guys are planning for on a sustained basis?

Again, yes, as long as none of those other factors change which would cause us to make an adjustment.

And then related to that just given the mix shift that you're seeing towards let's call it lower end vehicles, maybe cheaper vehicles, does that have much of an impact on the wholesale side?

I don't know.

I don't think so.

I can't really answer that.

Okay, all right, thanks a lot, guys.

Okay.

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

Good morning, everyone.

My first question was on the wholesale business.

Could you just discuss maybe why you think attendance has been so robust and sort of how is that end customer financing their purchase and have you seen any issues in that end of the market?

You would think there would be some more trouble there, but remember, that our average car is only a little over $4,000, so I really can't explain it.

Our attendance has been very strong.

Our attendance in the fourth quarter this year on a dealer to car ratio was stronger than it was in the fourth quarter of last year.

So there's clearly still a market out there for that product and the dealers that we're selling to are buying pretty strong from us.

And one thing that could be happening and this is sheer speculation, is that some of the other sources that these dealers normally go to, maybe they're just spending more of their attention on us and not spreading their purchases out as much as maybe they would in a more robust environment.

Remember, we sell 97% of everything that we run, so it's a pretty, it's almost an absolute auction so when dealers come to our sale, they know if they're the top bidder they're going to get the car and maybe when there's a choice to be made, should I go to this auction or that auction, we hope they choose us and it looks like they have continued to do that.

Okay, and then secondly, I was just wondering if you have any significant additions to the consumer offer this year or new product launches and I guess I'm referring to things like Internet appraisals, direct Internet sales, et cetera.

Nope.

We don't have any -- nothing that dramatic planned.

Again, as I've talked about in the past, continued refinements to all aspects of our business are the things that we are most focused on.

We've obviously made a lot of progress on our website and the Internet.

I can can tell you that the chances of us doing Internet appraisals without looking at cars any time soon is slim to none.

We don't feel real good about making offers on cars we don't get to look at first, so I don't want to say never on that but it's unlikely that we'll do anything like that soon.

In terms of delivering the car and consummating more of the deal online I think we've continued to make progress in that area but we don't expect to be able to consummate the entire deal online this year.

Okay, and then lastly, regarding CAF, can you comment on whether you've had discussions with private investors to sell off whole loans?

I think Keith has commented on that enough.

We're in the middle of trying to get some stuff done here and it just doesn't make any sense for us to talk about all of the different alternatives at this time when we're in the middle of trying to get some deals done.

Fair enough.

Good luck.

Your next question comes from the line of John Fox with Fenimore Asset Management.

Good morning, everybody.

I have two questions probably for Keith.

First one is this 855 million in the warehouse, I guess you're going to securitize some portion of that this quarter and the 14 million will be against the gain on sale that you would take on that in this quarter?

Well, to the extent we finance it.

I mean, we will not be financing the entire 855 this quarter just because there are requirements for some minimum number of payments before you can turn around and refinance them in the other channels.

Right.

But the majority of it, yes.

Okay, and then there would be some additional costs assuming the markets don't change if you securitize in the second, or third, or fourth quarter; is that correct?

Right.

Okay and then my second question--?

It's all contemplated in our forecast.

I'm sorry?

That's all contemplated in our forecast.

Okay but you're just breaking out 14 on the kind of first securitization to come?

Because it pertains to the originations from the prior year.

Okay.

And then Keith, I wonder if you can just tell us a little bit more about the accounting on the discount rate change?

Your last sentence in that little paragraph says it effects the timing of income recognition and the adjustment should result in higher levels of interest income in future periods.

Can you talk about the amounts and how fast those might be recognized through the CAF income statement?

I'd say the majority of them will flow through next fiscal year, and so we do expect a higher level of interest income on cash next year.

That assumes nothing changes.

Right.

But then the rest will come in in the next couple of years.

Okay, thank you.

Thanks.

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

King & Associates.

Good morning.

Your decision to sacrifice some gross margin, did that improve inventory turns during the quarter?

Well, strong sales improved inventory turns during the quarter.

Whether we attribute that all to giving up the margin I couldn't say as I said earlier but we had strong sales and I don't know.

Well, I guess when you lower prices on cars did you see them moving faster, maybe another way of asking it?

Remember we had a couple of different things going on during the quarter.

We just talked earlier about the inventory up test so we had some additional inventory that we carried so our turns were actually slightly down this year's fourth quarter over last year's fourth quarter, but relatively speaking, yes.

We would think that we would have sold cars a little bit quicker but if you're carrying a little bit more inventory, then again, it's relative.

Okay.

So you're still hoping to use the asset backed securities market but you've said you're going to have higher debt levels.

Do those higher debt levels refer to the support your receivables or is this for other capital needs?

Well, we have 350 million planned CapEx, so we are planning on spending more money for our continued growth plan, and currently, we're anticipating that we will be having to support our receivables at least the sub tranches for some part of the year, which is part of the reason why we're anticipating a higher debt level.

Sub tranches you would be retaining rather than selling in other words?

Correct.

Okay and the warehouse just to clarify, the warehouse facility balance, that's off balance sheet to you, right?

Right.

Okay.

Finally, you're lowering your long term store growth target to the low end of your previous longstanding range.

Does this imply, should we read anything into this in terms of your view of the long term growth prospects of the CarMax business model, because obviously this is, your Company has been viewed rightly so as a big, long term growth retail story.

How should we look at that?

I wouldn't look at it like that at all.

We talked about making this subtle change to the way we talk about growth for a long time.

It's totally unrelated to the economic environment and it really is actually, just look at our last six years growth, it's averaged right at 15%.

So we've been saying -- like you said it's longstanding, we've been saying 15to 20% for six or seven years, you look back at the last six years I think the actual number is right at 16% and we just wanted to put out a number that more accurately reflected the pace at which we have been opening stores, and how we plan going forward and again, do I expect some year we'll have a 17% year and another year we'll have a 13% year because of construction delays and things of that nature?

Absolutely but we believe 15% is just an accurate reflection of what we've delivered on for six years.

So no change then in your view of the long term growth prospects of this Company?

None whatsoever.

Okay, thank you.

Thank you.

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

Good morning, everyone.

You said you're taking your money down percentages up for CAF.

What are you you doing to retail rates at this point and are you slowing down the pace of CAF originations?

Can can you just give us some color on what percentage of the business did CAF have and where is that going?

CAFs share of the business has been relatively consistent and quite honestly, what's happened because the spreads have widened, the good news is that some of that has been offset by the lowering of rates so generally all in, we're seeing no movement in the marketplace so we're not moving on our rates to customers either.

They tell us on a regular basis with our three day pay-offs if we're our of line and so far we feel like we're in great shape and don't anticipate any major changes but we're obviously watching that on a regular basis.

Can you tell us where the warehouse stood at the end of March?

Is it going up at like $200 million a month kind of pace?

Yes.

In that neighborhood.

Okay.

And if losses do go up above the 2.9 to 3% range, does that have any implication at all on funding options for you longer term or is that just a cost issue?

I think it's primarily a cost issue, quite honestly.

It will be, again, enhancement, it will be the timing of when we get the cash flows, should that happen but I don't think that there's a funding issue based on what we've been originating.

Okay and lastly, you've talked before about like a 6% organic growth or same-store sales growth kind of objective that you would need in order to avoid negative SG&A leverage.

Can you talk about or just give us any color on how you see SG&A playing out this year, just given your revised same-store sales growth?

Yes.

As I said we expect some deleverage this year and as we have said all along we need mid to high single digits to start getting some leverage as long as we're going to continue to invest in our growth plan and our strategic initiatives.

So this is a year where we are expecting some deleverage at that comp range.

If we delivered above the high end of the range on the comps that we put out then we would expect maybe to get a little bit.

Right.

Any thoughts on the magnitude of the deleveraging?

Is there anything you could do to constrain costs in the interim or is that not part of the plan?

We're looking to contain costs all the time.

We pay very close attention to that but at the same time we're investing in the long term prospects of the business.

So we're just trying to make the best decision we can each year about how we should spend our money in the upcoming year and that's what we've done this year.

Okay, all right, thank you.

Your next question comes from the line of Rich Kwas with Wachovia.

Good morning, everyone.

Keith, I'm just a little confused in terms of the 14 million.

If you haven't decided how you're going to fund the business really for fiscal 2009 beyond maybe the next month or so with the public securitization, where -- is that 14 million just related to whatever financing you're going to do in the near term and then I think you did mention that you factored in the higher cost associated with whatever you choose to do for fiscal '09 but how can you quantify that if you really haven't quite figured out which route you're going to take?

Well, the $14 million is really looking at the most recent public deals that have been out done, and anticipating that our cost will be similar to those.

Okay.

So if you took the 855 million and looked at the more recent public deals that looked more similar to CarMax from a characteristic and how they got priced, that's what we use to actually then calculate what that estimate is, so it absolutely will likely be different.

It could be slightly below $14 million, it could be above $14 million depending on what our cost is and what form we take to go finance these.

But assuming that you have to do multiple securitizations as the year progresses and I realize that that may not be the case, but assuming that is the case, then if spreads widen there would be incremental cost.

Is that how we should interpret it?

Well, if spreads widen above what the more recent deals have done, then that will have an impact on CAF earnings.

Currently we're basically saying the most recent deals we believe are indicative of where the market will be for the year and that's baked into our forecast.

So essentially no spread widening beyond from where it is right now?

Right.

But it's widened significantly over the last three months.

Over the 200 bips as I indicated.

Do you benchmark that, is that most recent in the last couple weeks or do you benchmark that at quarter end?

We use the ones that occurred in March as well.

Okay, great.

Then what was the recovery rate for the quarter?

Recovery rate was about 46, 47%.

Okay so that's down fairly materially year-over-year?

Correct.

And obviously that's baked into our expectations as well.

Okay, do you have any deterioration from that level or is that kind of the assumed level?

Well, I can tell you historically, we've seen recovery rates for a year as low as 42% and as high as 52%, and so if recovery rates were to go to the lowest we've seen for any year, could that affect us by another couple pennies?

Yes.

Currently, the answer is we're always dealing with the depreciating asset and I don't expect it to be material in any case.

And that's why we have that wider range there around our earnings expectations, because of the, again the uncertainty of the current marketplace.

That's a piece of it.

All these factors that we talked about.

Right, and that's helpful and then finally in terms of the independent dealers on the wholesale business, any signs that it's getting more difficult for those dealers to get financing to buy vehicles?

Based on your commentary, your prepared remarks, it didn't seem that way, but--?

Well, I answered the question on that as well.

I mentioned our attendance at our auctions was stronger this years fourth quarter on a per car ratio, dealer car ratio than it was last years fourth quarter, so we haven't seen it.

Okay.

All right, thank you.

Thank you.

Your next question comes from the line of Daniel Moore with Aquamarine Capital.

Yes, good morning.

In terms of capital allocation, obviously, applaud your decision to continue to invest heavily in your business to continue to build out aggressively the new stores and widen the mode of the business.

Is there anything that you can envision be it change in environment, be it stock price, be it something else that would cause you to revisit how you're allocating cash flow over the near term?

Well, I think I got asked this question last quarter and we pay attention to this all the time.

This is not a, it's not something that we look at once a year.

We're looking at it every month, every quarter and deciding what should we be doing from this point forward, and at this time, taking into account all the things that have happened this year, all the economic uncertainty but also looking at the strength of our business, the strength of our consumer offer, our confidence in our associates, our confidence in our ability to keep building stores in new markets we don't see any reason to allocate capital any differently right now.

And we've also obviously like everybody else, we hope that this economic environment that we're in is temporary.

But we're looking at it all the time.

And if things continue to get worse, then we would be more than willing to make the types of decisions we need to to slow down if we have to.

That's very helpful.

Appreciate it.

Okay.

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

Hi, good morning.

Hi, Brian.

First question, Tom.

With respect to the decision you made in the quarter to sacrifice a little margin to gain sales, in terms of how you went to market with this, you guys regularly markdown your cars as they sit on the lot.

Was this simply an acceleration of that or was there something, did you do something different to sort of advertise lower prices to your customers?

We don't ever advertise, we don't say it was this and is that in terms of pricing.

Generally, we let our model flow through and so if we're going to go after lower margins, then what it really means is when cars are made salable, we're shooting for a lower target at that beginning point.

We didn't go into the inventory and slice margin to do this.

We managed our margin throughout the quarter and we did it as cars were made salable.

And then once they're made salable at a lower margin target then that lower margin target flows through our pricing curve.

But this wasn't a case where, I think two summers ago, when, after Katrina and gas prices spiked, we talked about going into our inventory and specifically cutting prices on gas guzzlers and big SUV's and that was for a specific market condition that we felt we needed to address more aggressively but in this case that's not what we did.

So was there any way then, as you look at the lower price vehicles you sold, is there any way to gauge how the elasticity of demand sort to say for those car?

In other words what impact this actually had on your sales which were pretty good in the quarter?

There's a lot of speculation around here at CarMax about what the effect is of $100 or $200 but I would tell you that we don't have enough data to definitively tell you if we move X, then we will get X in sales and honestly, we feel pleased with the results but if you said what would happen if you went another $200 I really couldn't give you that answer and if you said what have happened if you didn't take the margin cut, I wouldn't be able to give you that answer either.

So again, this is the kind of thing that we're managing on a daily basis.

We are not going into this and saying this quarter let's shoot for this.

We're looking at it every day, every week and making pricing decisions with all the best information we have and trying to do what we think is best for the overall business.

And the second question I have and there's been a lot of questions on here with respect to your credit operations but more from a strategic standpoint, the issues right now seem to be probably near term so you are having to keep more, a larger number of loans in your warehouse facility.

At some point though, as you look at your business model, does keeping a larger number of loans in the warehouse facility or the inability to securitize these loans in a more timely manner, does that affect the way other parts of your business from a capital standpoint?

I mean, it hasn't yet, but part of going and expanding the warehouse facility was to give us some more flexibility.

So taking the warehouse facility from 1 billion to 1.3 billion just gives us a little bit more flexibility.

If you're asking are we -- have we specifically taken some capital from somewhere else and allocated it over here the answer is we have not done that yet.

Now we did talk about having higher debt this year, so that is a decision to allocate more capital in this direction.

But again we believe that's related to the extraordinary unprecedented market and that that will be temporary, and so we think that a few years down the road, who knows when, we won't have to make that decision again.

Okay, thanks a lot.

Okay.

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

Most of my questions have been answered.

My only remaining question is on the wholesale side, what range in your estimates do you have for wholesale vehicles next year, from a high and low dollar number in the estimate guidance?

You mean the price of the car or the margin?

Price of the car.

That doesn't move as much as you might think.

It's a little over $4,000.

I think we have it budgeted roughly.

I'm sorry, I'm asking the wrong question, I apologize, the gross profit per vehicle?

As I said in the beginning we are expecting to deliver flat margins.

Year-over-year.

So somewhere around $700?

I forget if we report it as -- I forget if we talk about it as a dollar amount or as a percentage.

Hold on.

Either way, it's flat.

Okay and my question is if there's margin pressure on the retail side, might that following down the line might there be margin pressure on that side as well?

Maybe.

In this case it wasn't but I think that that's more reflected in the volume than it was in the margins, so we saw our wholesale volume this year did not track with retail and I think that that was more where we saw the impact was on a lower buy rate and lower units through the auctions.

So I think that's where we saw that this year.

Thank you very much.

Okay.

Your next question comes from the line of [Scott Valentine] with FBR Capital Markets.

Thanks for taking my question.

In regards to CAF, the increased loss assumptions in the warehouse line, I assume it's due to increased seasoning, due to less frequent securitizations?

It's that and just the overall stress of the economy on our assumptions, so as we saw our other pools exceed our expectations, we assumed the same trend that's going on in the underlying marketplace will affect what's currently in the warehouse facility.

Okay, and then regarding the cumulative loss assumptions, the increase there, are you seeing any impact, I guess everyone is seeing impact from the housing market but any regional performance issues that you're seeing in terms of maybe Southeast performing worse or better?

Don't have that and I'm not sure if we would comment on it if we did.

We generally talk globally.

Okay and a final question.

The stimulus package the checks go out in May, do you expect any measurable impact on credit performance there?

We're actually hoping that we can get some customers to spend that with us and bring their delinquencies down and actually have a net positive and/or get them to buy, use that to buy a car.

Okay.

We hope some of that stimulus comes our way.

Okay, thank you.

Your next question comes from the line of Adam Wright with Kynikos Associates.

Hello, gentlemen.

A couple quick questions.

You mentioned that Americredit was only 1% of loans in the quarter, if I'm not mistaken, and you mentioned that that was recently as if it was higher in the past.

I was wondering through last year or even the year ago let's say, exactly how high was it?

Just trying to get an idea of?

I think they had reached the height of 1.5% at some times in the past, but like I said more recently it had been 1% and the way we really look at it is what are the unique opportunities that they're bringing to the table and what's the likelihood of others picking that up.

It was always very low, I was thinking much higher, so that's fine.

Okay.

Also, I'm sorry?

Yes, it's never been real high.

And also I think -- I don't know if you explicitly mentioned this but implicitly it seems that so far, the impact of the credit problems has been pretty much confined to CarMax automotive finance.

It doesn't seem like it has impacted the top line in terms of unit sales, am I right on that?

And also you're not expecting unit sales to be impacted, to what extent I guess -- here is the question, to what extent are you expecting unit sales to be impacted by the credit turmoil as opposed to simply funding costs et cetera?

Going forward?

Well, for the year we came in at 3% comps, we set our rage in the beginning of the year at 3 to 9, if you look at the midpoint of that it's 6.

I think a lot of our miss on sales was related to the economic environment and if you look at the range we set for next year, it's the first time we've ever put out a range that the first number is a negative comp number so we're expecting this to still have some impact on our sales.

We don't think it means anything in terms of long term viability of the business but we absolutely think it has impacted our sales.

Oh, sure, I see because I know that when you all took your numbers down in the, I believe during the second quarter call, I took that to be people pulling back away from larger ticket items as opposed to not being able to get financing.

And the difference between economic impact and literally not being able to get financing.

Oh, right.

And it is, we're not anticipating a pull back or lack of of availability on credit, to be a material impact.

It's really the broader economic impact that we're forecasting the softer sales.

That's what I was getting at.

Thanks very much for the help, thank you.

All right

Your final question is a follow-up from the line of Matthew Fassler with Goldman Sachs.

Just -- good morning again.

Two quick things.

I don't think you got this question yet but what do you make of the delinquency trends the prior couple months for your monthly disclosures?

I know that seasonally, the data that we tend to get for January and February and mid February and mid March tends to be a little bit better.

The data that we saw last month seemed like it came down to a greater degree than the seasonal trends would justify.

Is that significant in your view?

Well, the fact that we actually moved loss rates up in light of even though trends looking better really says that it is largely seasonal and that's why I wouldn't put a lot of weight on that.

We absolutely focus on what we believe the true seasonality is in coming up with our loss forecast, so the fact that we felt a need to increase in spite of the optics of delinquencies looking a little bit better said that we don't believe that that's anything other than seasonality.

Got you, and then one other question back to the fundamental core business.

One of the questions we hear a little bit more about is that as your public full line competition rolls out more comprehensive software packages like auto exchange, et cetera, that they are starting to get smarter in the way they come to market, and if you could just address what you see transpiring competitively, if you have seen any change at all in the efficiency of your competitions that come to market being on the buy side, be it in terms of pricing or whether you feel like the gap that you've come to market with historically remains intact?

I think it remains intact.

Again, we haven't seen dramatic changes in volumes from the competition and again our average store sells over 420 cars a month.

The average of the public new car dealers if you put it all together on used cars is about 50 cars a month.

We have quoted that number for a number of years and it hasn't moved very much.

I'm not saying they aren't getting better and they aren't doing a little bit of a better job but in terms of on a store by store basis we don't really see it.

Nothing in terms of the way they come to market at auction on the sell-side or on the buy side suggests any real behavioral change?

Not that we've seen but it would be probably better for you to ask them.

Of course, thank you so much.

Thank you, Matt.

Okay I think that's it.

Thanks very much for joining us today and once again I want to thank our almost 16,000 CarMax associates for all you do every day.

Our employees are truly our most valuable asset.

And we'll talk to you on the next call.

Thank you.

This concludes today's conference.

You may now disconnect.