車美仕 (KMX) 2009 Q2 法說會逐字稿

Good morning.

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

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

(OPERATOR INSTRUCTIONS).

Thank you.

Ms.

Kenny, you may begin your conference.

Good morning.

I'm Katharine Kenny, Head of Investor Relations at CarMax.

Good morning.

Thank you all for joining us.

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.

In providing projections and other forward-looking statements, the Company disclaims any intent or only obligation to update them.

For additional information on important factors that could affect these expectations, please see our Annual Report on Form 10-K for the fiscal year ended February 28, 2008, filed with the SEC, and our subsequent filings.

I'll turn the call other to Tom.

Thank you, Katharine.

Good morning, everyone.

Thank you for joining us today.

So as you may have seen, like many US retailers and financial institutions, we had a very challenging summer.

As we discussed in our release on August 6th, our comp sales declined dramatically starting with Memorial Day weekend, and remained weak throughout our second quarter.

The 17% decline in used unit comp sales reflected a similar decline in traffic at our stores, while conversion actually held up pretty well compared to last year's second quarter.

We remain confident that our reduced earnings primarily reflected the impact of the volatile financial marketplace and the weak environment for consumer spending.

We are currently taking measures to preserve our profitability and our capital, as well as our long-term growth plans.

We have made significant progress in reducing our inventory and variable expenses to bring them in line with our lower sales levels.

During the second quarter, we lowered our inventory by more than 13,300 units, in excess of $200 million.

The speed at which we did this is a testament to the strength of our model and our inventory management system.

We were also successful in shrinking costs, including the reduction of labor hours; although given the magnitude of our fixed costs and the sales decline, we still reported SG&A de-leverage for the quarter.

We expect to continue to find opportunities to lower costs in the future.

Despite the sharp decline in used unit comps, we made progress towards recapturing per vehicle used unit gross profit.

Due to reduced acquisition costs, we were able to keep consumer prices low but still increase gross profit by $128 per unit sequentially over the first quarter of this fiscal year.

And by getting our inventory in line so quickly, we minimized the need for markdowns.

Now let me review some of our other key financial results, first in sales.

In the second quarter, total sales decreased 13% to $1.84 billion compared with $2.12 billion in the second quarter of fiscal '08.

We opened three stores during the second quarter: A non-production store in the L.A.

market; and two production stores in new markets for CarMax -- Colorado Springs and Tulsa, Oklahoma.

At the end of the second quarter, we operated 98 stores in 46 US markets.

Used vehicle revenues declined 12% for the quarter due to the combination of a 6% decrease in average selling price and a 7% decrease in unit sales.

The average selling price was lower as a result of the decrease in industry used car prices, which contributed to our reduced acquisition costs.

Wholesale revenues decreased as well, as unit sales fell by almost 9% and average selling price fell by 8%.

Wholesale units again declined as a result of less appraisal traffic and a lower appraisal buy rate.

On to gross profit, the decrease in our second quarter total gross profit of $116 per unit compared with last year was due to several factors.

They included the sizable sales decrease in the quarter, and our inability to achieve the normal seasonal gross profit improvement earlier in the year.

In addition, as in the first quarter, the reduction in appraisal traffic and the appraisal buy rate led to the sourcing of more used vehicles at auction, which negatively impacted our average gross profit per unit.

Despite the lower appraisal buy rate and the resulting decrease in wholesale volume, we did report that our wholesale profit per unit increased by more than $100 to $897 in the second quarter of this fiscal year compared to last year; and at the same time -- although I mentioned our buy rate was down -- we did see it gradually improve during the quarter.

Our auctions continue to draw more attendance on a per vehicle basis and also on an absolute level, and we believe our wholesale inventory is even more attractive to dealers in this difficult environment, where more credit-challenged customers may be looking for older, higher mileage vehicles.

On to CarMax Auto Finance, our results at CAF also continue to reflect the volatility we've seen in the financial markets.

Earnings for the second quarter were reduced by $0.08 per share, largely due to unfavorable adjustments of $28 million at CAF.

And I will ask Keith to review the details.

Keith?

Thanks, Tom, and good morning, everyone.

CAF reported a loss of $7 million in the second quarter this year versus income of $33.4 million last year.

The gain recorded for loans originated and sold this quarter was down more than 60% compared to last year.

This was due to a variety of factors, including lower sales, higher funding costs, higher loss and discount rate assumptions, a slight decrease in CAF's penetration and a lower average selling price per retail vehicle.

Recall that during the increase -- the increase in our discount rate assumption, now at 19%, some of the gain that would have been recorded in the current quarter will now be reflected as higher interest income in future quarters.

Excluding the $28 million in unfavorable adjustments, which primarily related to prior year originations, our estimated CAF income per vehicle financed would have still been much higher than the average fee we received from our third-party lenders.

Let me review the components of these charges.

First, $15.7 million related to the increase in loss assumption, unsecuritized loans, mostly of 2006 through 2008 vintage.

Several pulls now have expected cumulative loss assumptions at or near 3.5%.

In today's marketplace, where everyone's losses are substantially higher than expected, our data indicates that our losses are still lower than others within comparable bands of credit.

We believe this continues to be a reflection of our transparent sales and financing processes and the strength of our customized scorecard, which significantly mitigate the risk in used car lending.

In addition, we have continued to tighten our credit standards by decreasing the loan to value percentage for some customer segments.

Second, $7.7 million represented a mark to market reduction in the carrying value of the subordinated bonds we hold, with a face amount of $115 million.

This noncash charge primarily reflects the timing of the recognition of income.

Third, $4 million is a result of the need to again increase the discount rate used to value our retained interest from 17% to 19%.

We discussed this originally in the fourth quarter of last fiscal year when we increased the discount rate from 12% to 17%.

This changed also primarily affects the timing of recognition of CAF income from the current quarter to future ones.

As many of you are aware, there appears to be limited liquidity currently available in the asset backed securitization market.

In anticipation of continued market volatility, we increased capacity of our warehouse facility it to $1.4 billion, and at the end of the quarter had approximately $800 million in available capacity.

Let me finally comment briefly on the decrease in income from our third-party finance providers.

This decrease primarily reflects our lower sales, but is always result of some changes in the mix amount and in the discount arrangements with some of those lenders.

This largely was due to some tightening on the part of some lenders and a reduction in the credit profile of the average customer.

One item of note that is of particular importance is that Drive Financial Services recently acquired Road Loans, previously owned by Triad, and its share of the business is thus increased.

Now I will turn the call back over to Tom.

Tom?

Thank you, Keith.

On to SG&A.

The SG&A ratio in the second quarter was 12.2% compared to 10.1 in the second quarter last year.

If you recall, at the start of this fiscal year we projected some modest SG&A de-leverage; but the magnitude of the negative comp store sales caused more than originally expected.

However, our success in rapidly reducing costs helped moderate the de-leveraging that would otherwise have occurred.

As I mentioned earlier, we were acutely focused on reducing variable expenses to bring our costs in line with sales.

During the quarter, we decreased labor hours where possible, instituted a hiring freeze at our home office, and are carefully monitoring all expenditures throughout our organization.

And we will continue to look for ways to achieve cost reductions.

Looking forward, by the end this fiscal year, we will have opened a total of 10 stores, including the last one in this upcoming third quarter.

We currently plan to open five to ten superstores in fiscal '10 -- fiscal 2010.

We plan to open three of these stores in the first half of next year, two of which will be in new markets for us -- Augusta, Georgia, and Cincinnati, Ohio.

And as you know, our plans are always subject to change due to construction scheduling.

The reduction in our store openings for the next fiscal year reflects our previously announced decision to temporarily slow growth.

While we still consider ourselves a solid growth story, we pulled back the pace of our long-term growth goals in order to reduce expenses and capital spending at a time when we are generating less cash from operations.

We believe this is a prudent decision for the near term and will help us protect our long-term objectives.

Let me close by saying we retain every confidence in the unique CarMax model, our consumer offer and the long runway of growth ahead of us.

It is during tough times like these that we rely even more on the skill and dedication of our associates.

Thanks once again for joining us today, and especially thanks to all of our CarMax associates for your understanding, patience, and for all you do every day.

Now I'll open it up for questions.

(OPERATOR INSTRUCTIONS).

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

And your first question comes from the line of Rex Henderson with Raymond James.

Good morning, and thanks for taking my question.

First of all, I wanted to focus a little bit on CAF and your assumptions for the loan losses now being originated.

You told us what your -- what the peak loan loss assumption is for the previous securitizations.

I'm wondering about what your expectations are for the new crop of loans?

Well, I'll just give you a general description.

We currently now have -- our six most recent public securitizations range in loss assumptions from 3.1% to 3.5%.

And our current originations are projected slightly less than that range, and for the simple matter is that we continue to do significant tightening, and the impact of that tightening, we believe, will bring them down somewhat under that range.

And as you tighten a little bit, what do you think the impact on sales has been so far and going forward?

Well, that's the thing that we continue to monitor.

And one of the things -- the reason we don't jump out and go tighten everything immediately is, is we try to balance the sales impact with the loss impact.

And the good news is that we feel like we've found some significant opportunities to reduce losses without having a substantial sales impact thus far.

And we'll continue to test going forward other pockets and see what happens.

But I wouldn't expect any material impact on sales at this point.

All right.

And finally, can you give me some color on trends in same-store sales in August?

It must have been better than July, but can you give me some sequential -- how it progressed through August and into September?

Well, you know, when we came out on August 6th, we talked about June and July being negative 17%, and the quarter ended up at negative 17%, so.

Yes, I also remember hearing that July was worse than June.

So July must have been better -- must have been worse than minus 17.

August must have been right in line overall?

Yes, I mean, that's about as much detail as we're going to give, Rex.

It was negative 17 as of August 6th when we announced it through the two month,s and that's kind of where we ended up.

Okay.

All right.

I'll let some others asks questions now.

Thank you.

Thank you, Rex.

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

I wanted to follow up on one of the financing questions with Keith.

I guess my understanding historically was that you wanted to keep kind of losses topped out at that 3% range to keep the prime status of your loan portfolio; and I guess I'm curious, I know you're tightening, but it sounds like you're still looking for a little north of 3% in your current originations.

Is this something where we're going to kind of see permanently lower spreads going forward as you kind of morph into something that's a little less prime than historically?

Well, Sharon, I basically indicated that our current assumptions look like they will be under the range of 3.1 to 3.5, which is the six pulls that I mentioned earlier.

So we are going to be in that vicinity of 3%.

The market is obviously changed, and the comparative stats we're going up against are also changed; and so whether we're prime or not, the real issue is, is the liquidity issue over overall in the marketplace.

We feel like, given our experience and our history in the marketplace, that assuming there's a market there, we will be able to get these funded in due course and shouldn't have any significant problems.

When do you anticipate doing your next securitization?

That will depend on the liquidity in the market.

I mean, quite honestly, you know, we're hoping that what the government is working on right now will help loosen up some pockets and get people interested in buying securitizations again.

Are you still evaluating other scenarios, or is the securitization route pretty much the one that you are committed to at this point?

Well, sure, we're talking to our banks and trying to be creative and see what other options are out there for us, as I'm sure everyone is; but the primary mode for us and most of our lenders that support CarMax are really the public securitization market.

Okay, and then --

That's one -- Sharon, that's one of the reasons we introduced our -- I mean we increased our warehouse facility, is so we had some flexibility here to wait and see what happens with the market.

Sure.

Understood.

Tom, wanted to ask you question as well.

You know, I've been following the stock more than six years and I don't think I've ever heard you guys say that you might have lost some market share in a quarter.

So I guess -- I understand it's lousy everywhere -- but if you look at either geographically where you think you slipped some or elsewise, I mean, where do you think you lost a little bit of edge vis-a-vis the competition?

Well, whenever we talk about market share, we always talk about the data not being as good as we'd like it to be.

We've referenced it often as we have gained shares, so we felt like we should reference when it we saw a very, very slight decline; but that decline was only through July, so we really haven't seen August data.

We always do it on a 90-day rolling basis, and it's only available in half of the markets that we operate in.

So we're very concerned about it.

We don't have enough information or visibility into it to really -- you know, it could be an anomaly in the data.

So at this point I felt the need to mention it, but we don't have a lot to talk about.

As some more time passes, I think we'll be able to have a little more -- just a little more visibility and a little more scope into what's actually happening.

But again, it was very, very slight and it was only through July, so we don't even have August data yet.

Okay, and then last question.

I know model year changeover is also somewhat excruciating every year.

Is there anything kind of in the pipeline from the manufacturers that's going to make this even kind of more challenging for you, or do you feel like your inventories are really lean and it's not as worrisome as normal?

Well, it feels pretty challenging right now.

I'm not sure the manufacturers can do anything to really change it very much; and in terms of our inventory, we have been aggressively, as we've said numerous times, getting our inventory down to our sales rate.

We're also heading into normal seasonality into the fall.

We feel pretty good about our inventory position right now regardless of what's happening with model year changeover.

You know, model year changeover is kind of built into our methodology every year for inventory management.

And we're kind of paying attention to all those normal trends in addition to this significant drop-off that we've seen over the last few months.

Okay, best of luck.

Thank you, Sharon.

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

Hey, good morning.

Good morning, Rich.

Tom, in terms of back to the inventory question, could you share with us any data on your body on frame truck mix and how it trended and where you are now versus last quarter?

Well, I don't know what you mean, body on frame truck mix.

Traditional pickup, traditional SUV.

Well, pickup and SUV for us has run about 30% of our total mix; and honestly, our mix didn't change very much through the quarter.

What has moved all over the place is our ability to make a profit on it.

And we've subsidized that by cutting margins significantly to keep that inventory turning.

And what we did see towards the end of the quarter -- particularly in August -- is a flattening out in the depreciation, and the demand came back kind of enough for us to -- I mean, came back enough for us to begin to make what we would kind of consider normalized profits again on that segment; but surprisingly, the mix didn't shift as much.

And I think that was partly driven by us, because we were willing to take significantly less margin to sell the product.

Okay, so the big swing factor is going to be the wholesale market going forward, not necessarily the change in your inventory mix?

Well, I would have -- actually, to be honest with you, I would have expected this quarter to be significantly lower on mix and it just wasn't; and I think that that's largely due, again, to our willingness to take such a lower profit on the product.

But if you asked me at the beginning of the quarter with all that was going on, I would have expected that to shift a little bit more than it did.

Okay.

In terms of SG&A, are you -- what are you - I mean, you cut the store growth rate.

How are you managing the SG&A cost management here, given that it sounds like you expect to return to the 15% store growth rate at some point?

How are you managing kind of the long-term versus short-term SG&A costs?

Well, it's always a challenge.

The decision to slow growth, I think, will have a pretty good impact on SG&A over time.

You don't necessarily see that all at once.

You don't see it in the second quarter really; but I think over time we'll be able to pull those expenses down.

We thought it was a good idea to keep the growth train moving, even if it was at a slow pace, so we wouldn't have a huge cost when we decide to start it up again, as you said, so we kept like it is.

In terms of the rest of the SG&A, a lot of -- for a retailer particularly -- a lot of your costs are in variable SG&A, which I think we've done a really nice job of controlling through the quarter, and we'll continue to pay attention going forward.

Advertising is obviously a big piece, and we're really just looking at the second half of the year and deciding how much we should be spending on advertising.

You know, there's an argument that when a situation -- when you have a situation like this, you should spend even more in advertising.

That, of course -- all those people who make that argument in are in advertising.

But at the same time, you have -- I'm not sure that in this current environment, spending a whole bunch of extra money is going to make much of a difference; but that's another area where we can control SG&A.

And what percentage of your SG&A is truly variable versus fixed?

I don't know that off the top of my head; but about 75 or 80% is in the stores, and that's where the majority of our variable labor is, but I couldn't give you the breakdown of variable to fixed.

Okay, and then final question on the warehouse facility.

Keith, do you have room to move that up beyond 1.4 billion?

Obviously, if need be, we will ask and try; but the answer is, is I can't give any assurances that we have the ability to do that at this point.

Okay, thank you.

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

Hi, good morning.

Hi, Brian.

So sort of -- a couple of questions on finance, I guess for Keith.

Keith, on the warehouse facility first off, how much -- what was the cost of getting that -- the extra $400 million in capacity?

And then where are we right now in sort of, say, the utilization of that facility?

Well, the cost really was in the form of enhancements, and so that it really changed the timing of earnings and cash flows back to the Company; so, you know, net-net, about roughly $1 million dollars a year from just interest costs if you wanted to apply that.

Okay.

And then how far are we into the facility at the end of Q2?

We have about 800 million capacity left at this point.

We're about 600 in.

A little over 600.

And then Keith, last time when you completed that large private deal -- and that was several months ago -- how -- as you look at where the securitization market now, is it clearly more difficult now than it was then, or what's your read on that?

Yes, I mean, right now, as we look at the securitization market, we're looking for any deals to get done; and one thing -- we'll be ready to go if and when the market opens up.

It's just not open right now.

So it's much more challenging.

And then,Tom, I was going to ask, on the new store growth, you pulled back the growth.

You guys have a long lead time at opening the stores.

I mean, is it fair to assume that if you didn't have some of these already in the works you would open far fewer stores in 2009?

Well, I mean, we had a lot of stuff in the works, as you can imagine, with the growth plan we had in place.

The answer is, we could have probably pulled back more of these.

We think this is a good level for us.

We think that five to ten stores is right now the right decision, and we're being extremely diligent on the mix of what those five to ten stores look like.

Now, a few of them were just pushed from this year, so we really didn't have much of a choice there; but in terms of going forward we're just trying to be as thorough as possible with analyzing, you know, what's the best possible way to go.

But the number of five to ten stores, I think, gives us a little bit of flexibility from the low end and the high end, and at the same time keeps our growth going, even though it's at a modest pace, so that we have some of those critical functions still in place if we want to get going again.

So we're pretty comfortable with the decision we made.

Okay, thanks a lot.

Thank you.

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

Good morning.

How are you?

Hi, Matt.

Couple of questions.

First of all, as you think about -- this is going to kind of focus on credit and the impact on sales.

As you think about both your own tightening of your standards on CAF and of your third-party lenders tightening of their standards, were those dynamics that intensified as the quarter progressed, and then here into the third quarter, or would you say they were consistent through the second quarter?

Well, what's happened, Matt, is, is that our lenders are trying to make changes, and unfortunately none of them have a CarMax unique scorecard.

So as they make those changes, what's happened to us is kind of fits and starts, where we'll also get caught up in a change, we'll point it out to them, and then they'll come back and focus, no, no, we didn't intend that for CarMax.

And so that's kind of a push-pull that we're doing, and communicating weekly with them, and letting them know when we're seeing a change that's either detrimental or positive, so that they can know whether they're moving in the right direction or not.

They also still indicate that our pulls -- our portfolio outperforms their other books of business, so it's not necessarily intentional.

Although, I would tell that you all of them are facing the same liquidity issues that we are from -- for those that need the ABS market.

So it hasn't been a dramatic factor.

The good news is, is that thus far, really what's happened is, is that when they tightened, either another one of them has picked it up, and/or it's fallen down the channel -- sometimes all the way to drive -- in which case we pay a discount, but at least we're not losing the sale.

Can you talk about the proportion of sales represented by third-party credit vendors this quarter versus a year ago?

Let me look.

It's down very modestly.

And part -- and when I say that, you have to kind of caution it, because the other thing that we see, both in prime and non-prime is, is we have more customers coming to us this year with prearranged financing.

So it's really hard to say how much of that is just attributable to their own financing versus what the consumer is doing in advance.

Understood.

I have a second question about SG&A.

You reduced your SG&A dollars 13 or 14 million sequentially, which we had rarely seen previously, and -- second quarter versus first quarter, given the typical pickup in volume.

Given that your store expansions are going to slow substantially and new stores shouldn't add materially to the expense base, is this 225 million pre-CAF a sustainable level of SG&A dollars on a quarterly basis, or would you say that there needs to be some creep in that number?

Well, here's what I would say, is, I mean, first of all, one of the things we did do, is we have a model for SG&A just like we do inventory; but given the precipitous drop in sales that we're at unprecedented in nature, we actually consciously accelerated that model in variable selling expenses and adjusting stores hours, so I was very pleased about how much we could get those down.

But when you go forward, I would tell that you SG&A is largely derived on variable SG&A on comps.

And so if comp sales increase, we'll absolutely see SG&A increase ratably.

We have to have the store staffing in order to support the customer flow that's coming back, and so that's just a matter of when the customers come back.

If we were to run flat for the next year and at this pace, yes, there would be very modest creep, just from inflation; but I'm hoping that we're going to see the economy turn around here and we won't to have worry about that.

We'd be happy to add that SG&A back, because we get a great return on it.

Understood; but if the sales weren't there, you'd be able to keep it pretty close to here?

And I guess the other question is, were there any significant reversals of accruals for incentive comp or anything else that might have driven the number down versus Q1?

Well, we didn't -- No, but we didn't accrue any bonuses for corporate, as you might imagine.

But you didn't have to reverse any accruals?

No reversals, no.

Great.

And then one final question.

You talked to some element of stabilization, and I guess you're implying residual values on the truck and SUV side, contributing to some normalization in margin patterns there, et cetera.

If that were to be continued -- and presumably that relates in part to the volatility of energy prices -- is that something that might aid sales?

In other words, do you feel like the markets froze up to such a great degree -- obviously they did -- and that impeded your sales numbers in that some more normalization of those markets might lead to a little bit of renewed velocity?

Or would you say that the kind of comp decline that you experienced is less a function of that internal used car market dynamic and just more a function of money in people's pockets?

Well, I think it helps sales and profits in that segment; but I mean, to be honest with you, Matt, what's really missing is customer traffic.

And until consumer spending comes back, I'm not sure we're going to see a dramatic change in our sales rate.

There are so many different things going on, there's so much volatility in the marketplace right now; the SUV piece of it is only a small factor.

And within our inventory, we might see that piece within the total mix pick up some; but until we see consumers come back and start wanting to spend money -- and in some cases a used car is discretionary spend -- I don't think until we see that we are going to see a dramatic change.

So you think, then, it's more a function of consumer spending than it is of people's reluctance to take the trade-in with a big hit?

I think there's lots of factors in there; but, yes, I think it's more consumer spending.

And you know, as we keep saying, we saw a roughly 17% decline in our traffic, in customer flow walking through the door.

Got you..

Okay, guys, thank you so much.

Thanks, Matt.

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

Yes, Tom.

I guess in past times, used car business has gone down less relative to new car business.

Now it seems -- in your mind, is this out of whack with what should be the case?

That is, new car business down 25% and we're down 17%?

A lot of times it's been -- used cars would be down a lot less than that.

And as you look out to next year and the year after, do you think this is going to stabilize, or do you think the relationship has stabilized for some reason?

You know, I really don't know, Hardy.

And I would say if new cars are down 25% and we're down 17%, at least we're not down 25; so there's still a difference there between used and new.

We are at the higher end of the used car market, as you know, with our average retails in the 16 to 17 grand range.

So - and as we've talked about with wholesale, we've seen some pretty strong demand in the lower end of the market, down around four grand, where, from a retail perspective, we don't play that in market.

But in terms of what's going to happen going forward, we have -- it's almost impossible to predict.

And the only thing we're trying to do is make sure we line up our expenses and we prepare ourselves to weather through this and come out of it a stronger Company; but in terms of trying to predict what's going to happen over the next six months or a year, you could ask 10 different people and get 10 different answers.

I see.

Okay.

Sounds good.

All right.

Thanks, Hardy.

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

King.

Good morning.

Some of my questions have been answered already, but I've got one on SG&A.

One of the drivers of SG&A in the past has always been your real estate organization, which is necessary to continue your growth in the store base.

So with the pull-back in store growth, is that an area that you are cutting back on in terms of headcount or other capacity?

And then what would it take to restart that once things get better and you decide to reaccelerate store growth?

Well, you mentioned real estate, but we have lots of areas of the Company that are directly related to growth.

And in those areas, we are paying attention to our expenses and our costs as closely as possible.

But we have a lot of great people in this Company, and some of those folks have multiple skills.

So in some cases, we're looking where we have somebody that might not be fully utilized and we'll allocate them to something else that we think is a high importance to the Company.

So we haven't actually -- and again, we're still growing, so there's still work to be done, although we have slowed it down.

Your second question on how fast would it take to us get going again, or what would it take for us to get going again, it would it take a big change in what's going on in the economy for us to get rolling again.

I mean, we'd have to see a big pick up in sales, we'd have to see a pick up in traffic.

I think consumer spending is going to have to come back pretty dramatically.

And when we see that happen, then we'll take a good look forward and see what our best plan of growth is going forward and how much to accelerate the plan that we have now.

Okay.

And then from what you can tell -- and I guess this is -- maybe some of the details are sketchy, but the bail-out plans by the Fed and the Treasury, what effect do you see this having on the asset backed securities market going forward?

Do you think that this is going to be what it takes to open that market back up for you?

We have no idea, but we have our fingers crossed.

Okay.

So not necessarily -- you can't really tell at this point?

We can't tell you.

I mean, until we see it, it's hard to really speculate.

I'm hoping it has a positive impact.

But until we actually see some stuff loosening up, see some deals get done, it's really hard to say what's going to happen.

Right.

Any feedback from your bankers at this point, or is it too early?

It's too early.

Okay.

All right, thanks.

Thank you.

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

Good morning, everyone.

Good morning.

Can you confirm that 1.8% gain on sale?

Was that net of a 3%, not a 3.5% loss assumption?

Well, that was net of our current -- which is -- yes, slightly less than the 3.1 to 3.5.

So you're average APR in originations is holding in the high 9's, basically?

Basically.

Okay.

Because you are assuming L plus 200 on the warehouse, something like this?

Yes.

In that ballpark.

Is the cash penetration still around 40%?

And if the commercial paper market remains tough, third party financing sources just tighten a bit more, are you comfortable increasing CAF penetration for awhile?

Well, that's a difficult decision, not seeing any liquidity in the marketplace.

Where we could pull back is perhaps at the upper end, and we have B of A there.

The challenge there is, is that it does alter the mix of the portfolio; and, you know, obviously, we could adjust the assumptions there, but we're trying to navigate carefully through this, and watching carefully.

Right now, we're staying the course; but I can't tell you what we'll do, and it really depends on how quickly some of the actions that are being taken by the Fed and government, Congress, and what impact they have on the securitization market.

There aren't a lot of attractive alternatives.

Are you at 40% currently or above -- I think that's been the historical penetration?

We're not meaningfully different than our historical penetration.

Okay.

And to control penetration levels, is that something that you would do by just adjusting APRs, of -- and which would then support your margins -- your financing margins -- or would you do that through other means?

Well, the challenge is, we have our three-day payoff.

So we -- obviously our cost of funds, even though the consumer sees the Feds staying steady on rates at 2%, our cost of funds are up significantly, to your point earlier.

We have -- and will continue to test -- increasing rates.

Customers had the ability -- especially the better customers -- have the ability to pay those off in three days, and they actually do take full advantage of that.

So we have to balance the -- their liquidity and pricing issues with our own ability to finance them, and it's not as simple as it might seem on the surface.

It also depends what the lenders do that we have available for them at our own store.

If we move our APRs and none of the other lenders move -- and we move them up -- then we lose a lot of share.

Right.

I guess -- look, it just appears that given where the asset backed market is today, the spreads would clearly be lower than that 1.8% on securitizations currently.

So I guess, is the --

Well, let me follow up on that.

I mean, remember, we also mentioned that we had a change in enhancements on our facility and that we also had a change in discount rate; so our actual APRs to customers are just slightly over 10%, but when you put those two on top of that with the higher losses, then that's why we end up with the 1.8%.

Right.

But I guess the message you are sending is the strategy here in this business is not so much to protect the profitability of CAF, it's just it to keep the volume flowing through the stores at this point?

The principal reason CAF exists is to support CarMax; and, yes, temporarily there's a balancing act that we have to manage through.

Yes.

Is there any strategic alternatives that would be available to you that would -- might be a better balance in the future just to eliminate some of the volatility you are having here in this financing source?

Like I said, the -- all of our partners, with the exception of one, to my knowledge, have similar challenges from liquidity in the asset backed market.

So it's not clear to me that there's a lot of strategic alternatives that are significantly different.

Okay.

Thank you.

Your next question comes from the line of Cid Wilson with Kevin Dann & Partners.

Good morning.

Can you give us any thoughts in terms of how sales were from a geographical basis?

We don't generally talk about geography too much here, so.

Okay.

And you have a meaningful presence in Texas.

Was there any impact from the hurricanes or anything that might have increased expenses that we should be aware of?

Well, we're only talking about the second quarter here, and the hurricane didn't hit until the third quarter, so we'll talk about that at the end of the quarter.

But it did hit Houston.

Houston was largely -- a lot of people were moved out of Houston.

There was a lot of power loss in Houston -- our stores were without power for some time.

We're still working on getting them all back up and functioning; but again, that's all third quarter impact.

Okay, thank you.

Thank you.

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

Two quick questions.

The first question concerns the gain on sale.

With the 19% discount rate and a 3.5% loss rate, what do you you think would be your range on pretax gain margins at that point?

I'd have to go calculate it, and we're currently not anticipating a 3.5% loss rate on our current originations.

Okay.

Second question is, I mean, given the variability in gain on sale which continues in that it's going to probably be eliminated by the end of next year, I mean, why don't you guys just go off gain on sale early and just report portfolio accounting?

It would eliminate a lot of volatility in the earnings and give a pure cash flow picture of what the business looks like.

We've discussed that.

We actually think the gain on sale, even though it does look likely that it might change in the future, does a better job of reflecting the environment that you are originating in.

So, for example, looking at the current market and increasing the discount rate and the funding costs related to what's going on matches that portion of it.

And historically, cash flows have generally been in line on an annual basis with our overall accounting.

Okay.

Thank you.

Next you have a follow-up question from the line of Rex Henderson with Raymond James.

Thanks for taking my second question.

I wanted to ask a little bit about inventory, then inventory mix, and whether you're satisfied with your mix of higher mileage, lower priced vehicles right now, or maybe they're higher priced with the demand there.

And whether or not you think you could -- your sales would have been a little better had you had some more of those higher mileage vehicles.

Yes, it's really hard to say unless -- it's just hard to predict what the results would have been.

I think in this environment, if we had some lower cost vehicles, maybe it would have helped.

We were very, very focused through the quarter of getting our inventory in line with our sales, as we talked about numerous times.

But our average retail is down almost $1,000 I think year-over-year, so we do have a lower cost inventory than we had before.

Some of it is lower acquisition costs.

Some of it a reflection of the demand.

But I'm not sure that it would have changed it dramatically; but again, there's no way of telling.

And are you finding sources for higher mileage vehicles?

Are consumers bringing them in?

Are you finding them at the auctions?

Or are you struggling to find those kinds of vehicles?

Well, that's largely been sourced through the appraisal lane.

And as we've talked about, we have had -- we have seen a decline in -- of traffic and a decline in our buy rate, and so that has hurt our ability to get some of that stuff.

That's not generally something that we source off site, because you just don't have as much time to evaluate the product when you're at an auction as you do when it's in your own store.

So we're constantly evaluating our mix and seeing which direction we think we should be moving in, and we feel pretty good about our inventory right now.

Okay, thank you.

Your next question comes from the line of Victor Consoli with Perella Weinberg.

Just a quick question.

The $800 million you have left on your ABS facility, how many months is that typically?

I mean, what is kind of your average drawdown per month on a run rate basis?

Well, it should take us into January -- late January or early February at our current sales level, and that really depends on what our sales levels are and whether customers come back or not between now and then.

So when will you start exploring in the ABS market rolling over into a new facility?

Probably now, right?

It's ongoing?

Like I say, we've been in discussions with banks, as I'm sure all of our other lenders have been, and what are the other alternatives out there?

But there's never a reason to fear that you exhaust that facility, there's just no money left?

Right?

There's always some kind of a source.

You mentioned some B of A line, but when you start getting to the lower cost vehicles, would you literally be shut out of there if you didn't have an ABS line?

I'm just trying to understand how it works.

Well, the answer is, is we've always -- I've always believed that there's a market at a price; and we may not like that price, but I think that's generally going to be true.

And that market may change from the current ABS structure, given what's going on in the economy.

I don't know.

But -- so the answer is, is if we were unable to find any sources, then, yes, we could find ourselves shut out.

And we're, like I said, already in intense discussions of what alternatives might be out there.

Right.

And it just gets passed on to the consumer, right, at the end of the day?

I mean, it's got to be a rational market, so if it costs an extra 100 bips for you, it's probably going to cost an extra 100 bips for everybody, and then the consumer just picks it up?

That's exactly right.

I mean, at the end of the day, that's one of the things that hasn't happened is, is that the market hasn't been as efficient as usual, given that what's happening is, is it's happening in the spreads to what the underlying credit is; so it's not as transparent to the consumer, and so their receptiveness to doing it; but we've already seen some indications that our competition is moving rates up, and I think that's inevitable.

All right.

Thank you.

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

Just a follow up.

Keith, you mentioned that more customers are coming in with prearranged financing.

I thought that was interesting, because a lot of dealers are saying that their penetration -- franchise dealers are saying their penetration rates are up.

Do you have any data that shows what your customers are coming in with in terms of the source of financing?

I'd have to -- we can only source that after the fact, and I don't happen to have that right now.

We can do some drilling on it.

It has been a -- in this market -- kind of an unusual phenomenon.

In prior times when that's happened, we used to speculate that it was related to mortgage refinancings and things along those lines, and obviously that's probably not what's causing it right now, so -- but I don't have the data or the sources for that right now.

Okay.

I mean, that would be helpful, just if that type of trend continues, just to get an idea.

Yes.

Okay.

Thank you.

Next you have a follow-up question from the line of Jordan Hymowitz with Philadelphia Financial.

Yes, in the presentation, you have a line in loans originated and sold, 526.

Did you both originate and sell 526 million, or is there a difference between what you originated and what you sold in the quarter?

(Inaudible).

We're thinking.

Okay, it's -- so there is a timing difference between what's available and held for sale at the end of the quarter versus the other, so it's not precisely tied to what we actually originated during the quarter.

But it's fairly close.

So the number is within like $5 or 10 million of each other?

Probably a little bit more than that, given the timing of this quarter's -- because we had a weekend at the end of this quarter.

So you would actually have originated more than you sold in the quarter?

Apparently, yes.

Okay.

So arguably had you sold the full amount, the number would be a little higher then?

Correct.

Okay.

Thank you.

Next you have a follow-up question from the line of Bill Armstrong with C.L.

King.

A quick question.

With the slow down in store growth, what sort of capital expenditures should we see this year?

You mean next year, or the --

Well, in current year -- and next year, if you have that.

Approximately 225 million.

For this current year?

Yes, the current year.

Right.

How about next year?

We haven't done next year yet.

Right.

Okay, thanks.

Thank you.

And there are no further questions at this time.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.