車美仕 (KMX) 2009 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the fourth quarter and fiscal year earnings call.

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

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

(Operator Instructions).

Thank you.

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

Kenny.

Ma'am, you may begin.

Thank you.

Good morning.

I'm Katharine Kenny, I head Investor Relations at CarMax.

We're completely fogged in this morning, but I want to welcome all of you to our fiscal 2009 fourth quarter earnings conference call.

As usual, I have with me today Tom Folliard, our President and Chief Executive Officer, and Keith Browning, our Executive Vice President, Chief Financial Officer.

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 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 our annual report on Form 10-K that we filed for the fiscal year ended February 29th, 2008.

Tom?

Thank you, Katharine.

Good morning everyone.

Thank you for joining us.

In this morning's fiscal 2009 fourth quarter press release, we are pleased to report an increase in earnings per share to $0.17 compared with $0.10 per share in the fourth quarter of fiscal 2008.

We continue to be negatively impacted by weak consumer demand as we noted in our release, our conversion rate fell slightly during the quarter but the primary driver of our negative 26% used unit comps was again the low level of store traffic.

During the quarter, we continued to make progress on the plans we discussed at the end of last quarter, To suspend our store growth until market conditions improve and align our expense structure with our sales level in order to optimize our profitability.

Let me give you some specifics on how we've done this.

First, year-over-year, we decreased used inventory by approximately 16,500 units, or 28%.

We reduced SG&A expense by $23 million or 10% in 2009 fourth quarter, compared to last year, and this is despite a 12% increase in our store base during the year.

We achieved this by reducing variable selling expenses, as well as decreases overhead costs such as advertising, preopening and relocation expenses.

As of the end of the year, our total employment fell by nearly 3500 or 20% from its high point of over 16,000 in May of 2008, all of this mainly through attrition.

At the same time, in the fourth quarter we achieved an increase of $325 in gross profit per unit versus last year, despite the he decrease in sales.

Lastly, let me highlight that over the course of the year we reduced our borrowings net of cash by approximately $120 million.

On to sales.

In the fourth quarter, total sales decreased to $1.5 billion compared with $2 billion in the fourth quarter of fiscal '08.

For the full fiscal year, total sales decreased to approximately $7 billion from $8 billion in fiscal '08.

We opened one store during the fourth quarter in our Washington, D.C.

market.

During the fiscal year, we opened a total of 11 stores and ended the year operating 100 used car super stores in 46 US markets.

Used vehicle revenues declined 27% for the quarter, due to the combination of a 7% decrease in average selling price and a 21% decrease in unit sales.

Due to the unprecedented rate of depreciation in wholesale prices that occurred during the third quarter and into December, we decided not to build our inventory at our usual seasonal rate.

As a result, we carried lower than normal inventory for most of the fourth quarter, and we do believe this strategy may have contributed modestly to the decline in comp sales.

Our data also indicates that while we experienced a small market share loss in the fourth quarter, we still achieved a market share gain for the full year.

Over the last year, the average CarMax store sold 335 used vehicles per month while the average of the six public new car dealers sold 46 used vehicles per month.

We continue to believe our superior consumer offer will allow us to gain share over the long-term.

In fiscal '09, we sold approximately 345,000 used vehicles, an 8% decrease over '08 when we sold 377,000.

Fourth quarter wholesale revenues decreased by 39% including a decline in average selling price for wholesale vehicles of 17%, combined with a decrease in wholesale units sold of approximately 27%.

For the full year, wholesale unit sales fell almost 13% to 194,000, compared to over 222,000 vehicles in fiscal '08.

Wholesale units decreased more than retail sales, primarily due to the sharp fall in wholesale prices over the course of '09, which continued to negatively impact both our appraisal traffic and our buy ratio.

For gross profit, our sizable increase in fourth quarter gross profit per unit was partially a reflection of the unusually low gross profit in the previous year's fourth quarter, as well as the temporary benefit of buying inventory at the beginning of a period of appreciating wholesale prices Like in the third quarter and despite the reduction in sales, we were able to modestly increase used vehicle inventory turns in the fourth quarter compared with the prior year.

We believe turning our inventory quickly is the most important factor that allows us to pass on compelling prices to our consumers.

Our wholesale profit per unit increased $73 to $882 per unit compared to the fourth quarter of last year, once again, we believe this is a positive reflection of our unique inventory management system, and the continued success of our auctions, including a record dealer to car ratio, both for the year and the fourth quarter.

On to CAF.

For the fourth quarter, CAF reported earnings of $28 million compared with a loss of $1 million in the fourth quarter of fiscal '08.

The gain on sales of loans originated and sold this quarter fell to approximately $16 million, compared with $21 million in last year's fourth quarter.

This decrease was due to lower sales to lower average selling price per vehicle, and the decrease in CAF's origination penetration.

The gain percentage, however, increased from 3.6% last year to 4.3% this quarter, due primarily to a decrease in the benchmark rate.

We made minor offsetting adjustments to our loss and prepayment assumptions, each totaled less than $0.01 per share.

The cumulative loss expectation for our worst performing pool of loans edged up from 3.9% to 4%.

In previous quarters, the lack of financing opportunities in the asset backed securitization market and the uncertain future caused us to slow CAF's loan originations in order to extend the utilization of our $1.4 billion warehouse facility.

At the end of the fourth quarter, we had over $1.2 billion outstanding in the warehouse facility.

As you may have seen this morning, we announced a public securitization that will be eligible for TALF financing.

At the next subscription date, which is Tuesday, April 7th, when the deal closes, as always, the details will be publicly available.

We are pleased that the government's efforts appear to be improving liquidity in the asset backed market.

Our third party lenders remain willing to dedicate capacity to CarMax customers; however, we like many dealers, have seen signs of tightening, the full magnitude of which remains uncertain.

As for SG&A, as I noted earlier, our SG&A expenses decreased from $220 million in the fourth quarter of last year, to $197 million in this fourth quarter, reflecting our successful efforts to reduce costs, partially offset by the SG&A expenses related to the 11 new stores we opened this year.

Our SG&A ratio increased to 13.4% of revenue from 10.8% in last year's fourth quarter, when both sales and our average selling price were significantly higher.

Year-over-year, SG&A expenses increased 3% from $858 million or 10.5% of sales to $882 million or 12.7% of sales.

Looking forward, while we remain as confident as ever ever in the CarMax model and our long-term growth opportunity, we believe it's still too difficult to give meaningful guidance for the short-term.

However, if sales trends do not improve from the fourth quarter levels, and given the continued economic uncertainty, we would anticipate a double-digit decline in comp store used unit sales in fiscal 2010, particularly in the first half, where we have tougher comparisons.

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

With that, we'll take questions.

(Operator Instructions).

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

Good morning and thanks for taking my call.

First of all, the announcement on the securitization, I did not see that.

Can you give me a little bit of color on how big it will be, and any thoughts about pricing on that at this point?

Yeah, it's too early for pricing.

We went out with a deal that was sized at $735 million, of which we'll be offering 630, which means we'll be retaining the balance in sub bonds.

Okay.

And when you looked at the deals that Nissan and Ford did, what were the implications for you in terms of pricing, and any thoughts or interpretation of those deals as it applies to you.

They were out in the first wave, so honestly we don't know whether there that was an advantage or not.

We also -- there was a very low subscription rate from investors.

We think that by this deal, there's a substantial increase in both the availability of receivables being financed, as well as investors, and it's just really hard to tell and use those as benchmarks.

It's anyone's guess but we're optimistic.

Okay.

And finally, I wanted to touch on gross profit per vehicle.

I think Tom, you said that it was -- it benefited from the improvement in pricing through the quarter.

Do you think it's sustainable at over $2,000 a vehicle, or would you expect that to revert to the mean over time?

Well, I think that's probably a little bit high.

But what I really talked about was we had a unusually low gross profit in the fourth quarter, so the $300 difference or $335 difference, almost half of that was the difference between last year.

But the other dynamic was the record depreciation we saw in the third quarter that went into December.

If you looked at all the external data.

And as the market turned in January and February, it didn't make a lot of sense to lower our prices, when to go out and repurchase those vehicles with the appreciation we saw in January and February would have just been more expensive.

So as we always do, we manage our inventory the best we could with all the information that we have, and we have a very analytical markdown model that we use, and we made a conscious effort to adjust to the changing prices in wholesale, but I believe that by turning our inventories so quickly in the third and fourth quarter, we are, as I noted, we improved our turns in both those quarters, that we were able to continue to pass on compelling prices to the customers who bought cars.

You bought some cars very cheaply at the end of the third quarter, and then were able to price them at retail at a little better pricing early in the fourth quarter.

Is that fair?

It's really that we were able to hold the margin a little better.

Normally, we would make more aggressive markdowns but in light of the external information and the external purchases that we were making, we didn't -- it didn't really make sense to get aggressive with markdowns when, again, to go out and repurchase the same car, got more expensive in the fourth quarter.

Okay.

And finally, yesterday on the manufacturer calls, they said that their sales of fleet vehicles had ticked up in the last month after being very, very low for the early part of the year.

And part of the improvement in the used car pricing has been constraints on supply.

Do you think more fleet vehicles coming into the used market is going to have an impact on pricing going forward?

Usually the fleet vehicle turn is at least a year, so even if there's an uptick you won't see anything in the supply chain until at least 12 months from now, just generally the way the fleet stuff turns.

I don't know how big the uptick was, but we're talking about levels here that are unprecedently low and I don't know that a few percentage points up is going to make much of a difference in the supply long-term, nor do I know what the mix of those fleet cars were and whether or not that fits with what we sell, but as we said in the past, if you're referring to rental type stuff, that's not a big percentage of our inventory anyway.

All right.

Thank you very much.

Thank you, Rex.

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

Matt?

Can you hear me?

Hello?

Matt.

Can you hear me?

We can hear you.

Okay, good.

Sorry about that.

Question is first on the credit side, you booked a 4.3% gain on sale this past quarter.

What kind of gain is implied in the -- what kind of gain I guess next fiscal year is implied by the guidance that you gave for a $50 million to $85 million adjustment, when you actually securitize the receivables in the warehouse?

It's difficult to quantify that because what we don't know is we have a warehouse renewal coming up as well, and so that's coming up in July.

We don't know what the cost of that structure is going to be and it's obviously going to be different than our current structure, and obviously we don't know what's going to happen to benchmark rates.

So I really can't answer that.

All we did is kind of put a range on the overhang, that's our best estimate for what's in the pool now, and it's a fairly wide range as you saw, and it's our best estimate based on everything.

I really can't give you a number or answer to that directly.

Could you tell us what that range maps to from a gain on sale perspective?

Meaning for the fourth quarter?

Presumably.

Well, let's put it this way.

It obviously would have a significant impact on CAF's overall profitability.

I haven't gone back and said, gee, if I applied what I believe the current market rates are to CAF in the ABS market to the originations, obviously the gain would be substantially smaller, but I think given the range of what we have there on $1.2 billion, can you get pretty close yourself.

Fair enough.

Follow-up question on CAF as well.

Can you tell us precisely what the percentage of sales was that was directed to loans sold through CAF?

I don't have that.

I can tell you that our origination volume is down 20 to 25%, and obviously that was all intentional as a result of routing and trying to conserve CAF capacity.

Got you.

And then -- thank you.

And then on the gross margin question, essentially a follow-up from Rex's question, your gross margin I think that you booked, gross margin rate on used cars was something like 100 basis points higher than any gross margin rate you had ever booked, so clearly the arbitrage between the weak market conditions early in the quarter and the very strong auction pricing later was a huge help to you.

If you look at the Mannheim trends that you see right now, which seems have continued, would that arbitrage remain intact, enabling you to maintain the kind of margin rates that you saw, or do you think that the margins start to normalize closer to historical levels relatively soon?

Matt, the market's been so volatile over the last year and-a-half and things have been changing so quickly, it's really hard to speculate going forward what's going to happen.

We've seen just in the last six months, we saw a period of depreciation like one we've never seen before, and in the last two months, we've seen a period of appreciation like one we haven't seen before.

If you go back to last spring, we saw an entire segment depreciate faster than we've ever seen in the spring.

I'm just not going to speculate going forward what's going to happen with the market.

What I will tell you, is we watch it every single day.

We adjust our inventory and our pricing accordingly, and we try to do the best job we can managing our inventory regardless of what happens externally.

Got you.

Thanks a lot.

Good quarter.

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

Good morning.

A couple of questions.

Once you get the securitization done, is the idea to pick up that 20 to 25% of origination volume again?

How quickly do you get share back or will you?

The answer is, again, we still have the uncertainty of the overall market.

This gets us breathing room until July, and then we have a warehouse renewal and we don't know what that renewal is going to be.

We don't know what the capacity is going to be, so at this point in time, I think it will be premature to say we're going to go back and try to adjust our strategy right now.

We'll adjust it as we get more visibility into the future and more visibility into what the market's going to do from a capital need, from a funding CAF perspective.

When you go to -- well, for the warehouse facility, at what point do you enter renegotiations for that?

We'll be starting very shortly, obviously it's a unique environment and it used to be that Tom could start a couple weeks in advance and a year ago Tom Reedy, that is, our Treasurer, and last year he started a couple months in advance and he'll probably be starting as soon as this deal closes.

Okay.

I guess a question on the gross profit per car.

I know there are a lot of moving parts there but Tom, I think you're also buying more from auction right now than you have historically, given the lower traffic in the stores.

Could you maybe update us on where you are and kind of the percent of cars that are bought at auction versus customers and I mean, that's obviously a negative I think on the gross profit per car.

Yeah, it is a negative.

But remember too that our total sales are down a fourth, so although we're buying as a percentage more cars at auction, we're buying significantly less cars at auction than we bought last year.

So still, everything has kind of moved down in terms of percent of retail sales, represented from the appraisal lane, we had historically said it had been above 50%, and I think last quarter we noted that it dropped below 50%, and we saw that trend continue into the fourth quarter.

Okay.

The other point on the margin percentage that Matt asked earlier, one thing to note is we've always told everybody that we don't manage our margins based on price, so part of the percentage increase is that our average retails went down significantly.

When you're talking -- and I appreciate what you're saying about the depreciation and car prices, wholesale car prices and there's obviously a lag there and you saw improvement in retail prices, but I think you had the easy comparison as you mentioned in the February quarter.

Don't you have an easy comparison as well in the May quarter on gross profit per car, if I'm not mistaken?

I know we had a low starting point last year because of the end of the fourth quarter, so relatively speaking, yes, but as you know we haven't made any comment about this year's first quarter or this year.

Okay.

Are you seeing anything from a traffic perspective at this point that would -- I know that it's hard to be optimistic in the car market right now, but are you seeing anything that would make you feel somewhat better about consumer confidence going forward, or is it pretty much still catch as catch can?

As you saw with our traffic number, we didn't see any substantive change in the fourth quarter.

Went down a little bit, if anything.

Okay.

So it was pretty consistent throughout the quarter?

Are you going to try to get me to give cadence again?

Yep, yep you're not going to answer, Eh?

I'm not going to.

It was negative 26.

All right.

Thanks.

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

Hi, how are you this morning?

Hi, Scot.

Couple things.

Can you talk about the magnitude of the difference between pricing in terms of what you're booking into the warehouse and what rates you're expecting the market to bear?

Are you guys just not allowed to make inter quarter adjustments on that?

The structure is really that in the care house facility, it is a true gain on sale.

It's a presumed ending transaction, and so until we actually take them out and refinance them in a new transaction, we don't have any discretion there.

One thing I will point out on the overhang number, the $50 million to $85 million number, is that that is largely a timing issue, that is related to the amount of sub bonds that we're anticipating we're going to have to hold.

And so basically 10 to 15% of that might be real economics.

The balance is all timing.

It's revenue that we expect to get over the next several years.

But it's the accounting requirement that we have to follow.

Okay.

Any other adjustments in -- switching gears for a second.

Any other adjustments in SG&A?

Is what we're looking at a good run rate or were there other things, whether it was reduction in advertising, reversal of accruals that might have impacted the SG&A in the quarter?

There's no other adjustments for the quarter if that's what you're asking, for the fourth quarter.

It is what you saw.

Okay.

So obviously adjusting for sales and some of the variable stuff, that should be a good run rate going forward on the SG&A side, because you're not really building stores, et cetera?

Yeah, but we didn't really break out exactly how much went that was variable.

We said it was primarily variable selling expenses and I absolutely believe that the piece of SG&A that's associated with that is totally controllable on our behalf, and I feel like we did a pretty good job of managing it, and we should be able to do that for the upcoming year, just like we always do.

Okay.

That's helpful.

And then the last question is regarding the warehouse renewal, it looks like there's been some pretty big changes in the market, can you remind us of what your current terms are and as you assess the magnitude of adjustments others are experiencing, for example, can you just give us an idea of where you think things might go or might end up?

I really have no idea where they're going to go.

I can tell you that we're currently paying 2.05 over the-two year LIBOR, and it's going to go up.

I just can't tell you how much.

And I think that enhancements might go up.

I can't tell you how much.

And it would be speculative to really tell you any more.

Okay.

Still three months away.

A lot can change between now and then.

All right.

Thanks a lot, guys.

Thanks.

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

Hey, good morning, guys.

Hi, Matt.

So my first question is on the inventory that you have right now.

How are you feeling about your current inventory mix?

Do you think it's value-oriented enough?

There's been a mix shift away from small cars recently.

Can you just give us an update on your current inventory.

You mean current as of the fourth quarter, right, Matt?

Exactly, yeah.

We saw some pretty big swings in the percentage of sport utilities and medium and large sport utilities throughout the year but when the year ended things are kind of like back where they were before, and I feel like throughout the year, we managed our inventory accordingly.

So either through margin or through mix, we have moved our inventory along with consumer demand and at the end of the fourth quarter I felt like on a percentage basis, we were pretty well aligned.

We noted in the release that we didn't have as much total inventory as we would like to have had due to some strategic decision making we had in the third quarter about choosing not to build as much inventory as we normally do, seasonally.

But in terms of the mix on our lots, we feel very good about it.

Okay.

And then we've been hearing reports that auction prices are sort of high, in some cases maybe even close to blue book or close to a limit where lenders would be less comfortable financing some cars.

Are you worried at all about sourcing at the traditional wholesale auctions in terms of the pricing?

Well, I also haven't been to the auctions a bunch and seen this for a while.

I think this is short-term.

So we've seen a big appreciation here in the first couple of months.

My expectation is over the course of the year, we'll get back to a depreciation schedule.

And maybe even you'll see somewhat of a correction because I think maybe there was a little bit of -- just like we saw a correction into the beginning of this calendar year from the huge depreciation we saw at the end of the fourth quarter.

You might see a direction here in the spring and try get to a little bit more of a normal curve.

So I don't expect this to continue throughout the year.

Okay.

And then I may have missed this, but can you give your finance penetration and then maybe the different buckets in terms of where the loans are going?

We didn't give a total number.

We did note that CAF was down about 20 to 25% in terms of its penetration.

Right.

And we can give you specifics later if you would like them.

You can call Katharine or Celeste.

Generally, the 20 to 25% that we didn't originate was spread across the other lenders.

All the other lenders, absolutely.

If you're routing those loans to a third party, I presume you're getting some sort of a commission for that which would hit in your "other" line.

I'm not necessarily seeing it in the numbers.

Just wondering if there's been a change in the economics routing the loan to someone else.

The reason you're not seeing it is same reason you wouldn't see it in the third quarter.

As you recall, Santander acquired Road Loans who was paying us a commission, and upon acquisition, they started charging us a discount for that same segment of business and that is masking the incremental income we would be getting by routing more.

Got it.

So the unit economics for routing a loan to one of your other prime lenders hasn't changed?

And then the other element is that if you think just for the fourth quarter, following up, is that they always have the seasonal spike in the true subprime business as tax refunds come in so they do actually hit the spike in January and February that also masks that even more.

Got it.

Okay.

Great.

That's all I've got.

Thank you.

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

Good morning.

So just getting back to the wholesale pricing, you clearly had a bit of a windfall early in the quarter with lower prices.

You started paying more in January and February.

Were you able to increase your retail prices and maintain that gross margin spread, or are you seeing that narrowing?

Well, I mean, you saw the results at the end of the quarter.

That was through February and that's all we're going to discuss.

So -- I mean, that's how it came out for the quarter.

Yeah.

Okay.

I also did not see any announcement on the securitization.

I don't know if it's hit any of the news wires.

But I think you said $735 million total?

Yeah, it's on Bloomberg and it is $735 million total, $630 million offered.

Okay.

You've got $1.2 billion outstanding on your warehouse and your warehouse matures in July.

Why not do either -- why not do a bigger deal or alternatively, are you hoping to do a follow-on deal?

The answer is it depends on what demand is.

If there's sufficient demand, might we upsize?

Yeah.

We'll wait and see what the current situation brings.

Can you discuss the risks of the warehouse not getting renewed or not being able to renew this on acceptable terms?

The answer is is we don't know.

I mean, I believe that there's a market at a price and obviously if it's unfavorable terms we'll have to adjust our origination strategy through CAF.

The great news is that in trying to curtail our monthly volume we've learned a lot of tools and developed a lot of methods to actually do that without sacrificing sales and so we've already ramped up the learning curve and I think we can go further, if necessary.

If you're unable to renew the warehouse facility, what happens to the balance, the receivable balance, whatever that may be, at that point?

That amortizes, we don't have any obligation to repurchase it.

Okay.

So --

It's a non-recourse facility.

Okay.

Okay.

I get it.

All right.

Thank you.

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

Hi, good morning.

Can you hear me?

Hi, Rich.

Go ahead.

Okay.

Tom, going back to the SG&A, are there any chunks of SG&A that will be coming out going forward.

I know you made some initiatives, or did some this initiatives later last year, is there anything that we should be thinking about that's going to be coming out that's going to affect that line.

As you know, Rich, we didn't give any guidance going forward.

I would tell you that each and every quarter we're evaluating where we stand at a Company, what we think our sales might be, and we're making the decisions we think are in the best long-term interest of the Company and we'll manage our SG&A accordingly.

But I don't have anything to tell you about this year, one way or the other.

Okay.

Other than what I said earlier, which is I think there's a lot of variable expenses in the business.

I feel like we did a pretty good job of managing those and I feel like we will continue to do so going forward.

But we're doing what we think is, again, in the best long-term interest of the Company.

And in terms of new stores, you're not going to be doing anything this year, so really there shouldn't really be much coming out as a result of that?

That's another -- all the growth expenses that we saved, we will save this year once again.

So we've always talked about there being a lot of expenses around growth and starting halfway through this year, we began to curtail those and at the end of the third quarter we cut it completely, and so the year-over-year benefit of that you'll definitely see.

Right.

Okay.

But you got a fair amount of that in the fourth quarter it sounds like too.

We got a fair amount of what we would have spent in the fourth quarter, but then whatever -- you get the year-over-year impact as well.

We spent a lot in the first half last year.

No, I understand.

I understand.

The big picture, if any of these scrappage programs go through, what are your thoughts on how that impacts your business?

Well, until -- there's been a lot of different programs that have been proposed and until something actually goes through, it's really difficult to figure out what the impact will be on our business.

My view on it is, I don't understand why these incentives would only be out there for new cars.

Everybody keeps talking about how consumers have been spending more money than they can afford, and when you put an incentive that that's solely for new cars, it forces the customer to spend possibly more money than they can afford.

We're all for the incentives on higher mileage per gallon cars.

We have over 10,000 cars at CarMax that get more than 24 miles per gallon.

We just think the incentives should be for the consumer to decide whatever they want to buy.

And if they want to buy a used car, then they should be allowed to buy one.

The average new car is still around $23,000.

Our average retail is around 16.

So there's a big spread in price between new and used and we're trying to do everything we can to see if these incentives can be included so they're really and truly in the consumer's best interest.

All right.

And then in terms of Chrysler inventory, how much do you have of that and, in the scenario where there's a Chapter 7 where they liquidate, I mean how much -- I assume that you've been pretty careful on taking that type of inventory, but could you quantify what the inventory is right now for that?

I don't think we've given the exact number but as of right now, and like always, we manage our inventory based on how quickly we sell it once it hits the lots.

We turn our inventory very quickly, and we're adjusting our inventory as consumer demand tells us to adjust it.

So if people are still buying Chryslers, we'll still buy them and sell them.

If the values go down, that will be quickly reflected in the wholesale world, and we believe we'll still be able to work through that.

The other piece of news that came out this week is the government guarantee and the warranties on both Chrysler and GM, and I think that takes away a lot of the consumer fear about whether or not to buy the car.

I'm not saying there won't still be some devaluation, but hopefully, a big chunk of that was taken off the table.

I feel very confident in our ability to manage our inventory very quickly with changes, no matter what they are, whether the scrappage thing has some dramatic change in sales or if there is a bankruptcy or a change with any of the big three, that we'll be able to adjust quickly.

But we have never -- I've never thought it was a good idea to anticipate what impact some change is going to have on us and try to in advance move our inventory for that because more often than not, you'll be wrong.

All right.

Final question, CapEx, you're going to cut that to 20 this year.

Keith, is that -- I know a lot of that's because of your lack of new store openings, but I mean, going forward, if you're not going to be opening many new stores or any new stores over the next, say, two years, I mean, is that $20 million number a pretty good number to use going forward?

Yeah, I think that is.

I mean, we have a relatively young store base and we have a scheduled program that we actually go and do what's required to make sure our stores stay good and that is a capital portion of what we spend every year.

We spend a similar amount in actually the expenses of painting and repaving that doesn't get capitalized.

But I can tell you that in this environment, we have made no changes to that schedule.

So we are -- our plan is to keep our stores as fresh as always, make sure the consumer's getting the best possible experience they can get and CarMax and we have not changed that schedule one bit.

Thank you.

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

Hey, guys, my question's been answered.

Thank you very much.

All right.

Your next question comes from the line of Sam Yake with BGB Securities.

Good morning.

Good morning.

I wanted to take a step back maybe and take a look at the longer term.

Your made the comment that you're as confident as ever in CarMax's model and ultimate growth potential.

Sometimes I think we get a little too caught up in the short term and immediate future.

Maybe you can give an overview on how you see the business maybe five or ten years from now and if you think your growth potential is fully intact.

We changed our definition of long-term at CarMax to be one month, but if I was to try to look out five years, I think whenever this recession bottoms out and things turn around and consumer demand comes back and people get to get back to spending money, I think there will be significantly less dealers out there.

We are, right now we're consumer's first choice in every single market that we operate in.

I gave you some numbers earlier.

Our average store, even after our big decline, still sells 335 used cars a month at the end of the year.

You don't see anybody else putting out those kinds of volumes.

I think the consumer has shown time after time that we're their first choice and I think that when it does turn we will be well poised to take advantage of it and I think we will gain even more share.

We're only in 46 US markets.

We have significant amount of growth still in front of us.

I fully expect to get back to the -- to growing as we did before.

I don't know if it will be exactly the same percentage, but we have lots of markets that we would like to bring the CarMax offer to and we fully expect to do that over the long haul.

Obviously the signs you're looking for a turn in the economy to resume store growth.

What kind of things -- what specifically what are you looking for that would tip you off that maybe now is the time to resume store growth.

When we see customers start coming back to the stores in the numbers that they did before.

For us it's pretty simple.

There's a lot of factors that go into consumer confidence, and consumer's ability to spend.

When they start showing up at the door, then we'll know they're back to spend.

Thank you very much.

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

Good morning.

I apologize if I missed this.

I was briefly disconnected.

But just the $50 million to $85 million of CAF impact on the refinancing of the receivables in the warehouse, looks like it's around 5% of the $1.2 billion warehouse.

Does that mean that you guys are thinking that the weighted average costs on the refinancing would be close to like L plus 700 instead of the L plus 205?

Am I misinterpreting that comment?

The answer is that's true and part of that weighted average cost is the anticipated carrying larger portion of sub bonds and the implied cost of those, and as I mentioned earlier is is that while that's an accounting charge we'll have to take, the majority of that is really timing, and because of the sub bonds and we expect to get that income over time.

Okay.

Can just help me then understand what the -- how do you think about the weighted average cost of borrowing that, in that business, at the moment, given that there's like 15% inefficiency because of these retained tranches?

How do you kind of factor in all those when you look at what your borrowing cost is versus what your pricing is?

Well, I mean, that is absolutely one of the challenges that we have right now and we've made a conscious decision that because we believe this is temporary, and that CAF brings so much to our overall sales levels, that we're willing to accept the lower return.

So we factor that in to our view on CAF.

Now, if that doesn't turn out to be be temporary, and if the market becomes permanently changed, we're going to have to work on a strategy that maximizes CAF contribution but at a lower level of sales, and we're prepared to respond to that if the market makes us do that.

Okay.

At the moment, is there, based on what you're looking at, is there a contribution margin, though, on this, when you factor in loan losses and all these other things and retail versus your costs?

Yeah, absolutely.

I mean, again, a large portion of that overhang is really the mark that you have to take upfront on the bonds and we're going to get that income, and so there's absolutely positive cash flow coming in and positive earnings.

It's just a matter of because we do gain on sale accounting, and the factor that's very unusual for the last year and-a-half, requiring us to hold those sub bonds at extraordinary rates that makes it optically look worse than the true economics.

I know you're not giving guidance on comps, but obviously there are franchise dealers that are talking about somewhat better used volumes now.

Could you just talk a little bit about how would your numbers, or why would your numbers, going forward look different from what the other public retailers, the franchise dealers are talking about when they just give color on how the used market's progressing?

Well, we haven't seen anybody report a positive comp, so -- I mean, we haven't seen much of a difference there.

I don't know what people gave for estimates going forward but there is just way too much volatility out there in every aspect of our business for us to give any guidance that we would be comfortable with right now, whether it's on sales or earnings.

So I don't know what -- how other people looked forward but our view of looking forward is that it's way too uncertain for us to really give any guidance that would make sense.

Right.

Well, I mean, very few companies have reported activity in the first quarter or the first calendar quarter, but the auction houses certainly been talking about improving volumes and there has been some indication that things are moderating there.

Well, it's improving prices and improving volumes of an unbelievably low starting point.

The comps for year-over-year are still terrible, even at the auctions, although prices are up on a per-unit basis, auction volumes are down.

Right right.

Year-over-year.

Year-over-year, are you seeing any indication of sequential month to month improvement, or no?

We already a -- we talked about that as much as we're --

One last thing.

If you were to assume some volume recovery, how should we be thinking going forward about -- you said SG&A is -- there's a lot of variable expenses there.

How should we be thinking about how the SG&A comes back in on the incremental growth?

On the incremental growth.

You mean if we had a pickup?

if there was a pickup, exactly.

If we have a pickup in sales, you won't be asking about the pickup in SG&A because the profit will more than pay for it.

I understand that.

But is there any color that you can give us on of your SG&A, what is the percentage that's variable, within that cost?

So when we looked at that decline right now, what was the variable part of that decline, as volumes change going forward, how would SG&A be affected.

We haven't historically quantified that.

What I will they'll you is we said we're a largely fixed cost Company and so when sales go down, the bad news is is that that loss of leverage is painful and you've seen that impact on last year's results.

When sales go the opposite direction that leverage is very strong and we'll see a benefit and SG&A as a percent of sales will go way down and get back to more normalized levels when we recover back to two years ago sales levels.

Okay.

All right.

Thank you.

Your next question comes from the line of JT Wright with Cross Cap.

Hey, there.

Three quick questions.

The first one is we all have an opportunity to participate in a second TALF Act auction before you refinance or before you'll have to renegotiate the warehouse line?

Maybe.

We could if we chose to.

Okay.

There's one being offered.

And then what is the accuracy of CarMax.com as like right now it says there's, you know, about 23,000 vehicles that you all have in inventory.

Is that pretty accurate or --

It's totally accurate on vehicles that are salable and ready to sell.

It doesn't list any work in process.

Finally, my last question is, of the traffic that you do have coming in, can you all give any color on the credit quality of those customers or are they about equal to the relative credit quality of people you all have had in the past, or are they maybe less financable or more financable, depending on --

the credit quality has deteriorated basically since the first quarter and has been down year-over-year every quarter since.

Okay.

Sounds good.

All right.

Thanks, guys.

Thanks.

(Operator Instructions).

Your next question comes from the line of David Nuss with Sanford Capital.

Good morning.

Do have you an opinion on some of the unemployment assurance programs out there, is there potential for similar programs in the used market?

I understand some insurers are offering for a $75 premium, they'll take the risk of repurchasing a vehicle within a year.

That's been helping new car sales for companies like Hyundai.

Yeah, we're aware of those.

We're currently evaluating them.

It's challenging, because you also have to look at, the truth is is, you know, that adds actual additional spread to the consumer and it's a delicate balance.

So it may be something that we at least explore enough to launch a test on, but it also could be a very temporary program and depending on the efforts when people believe the economy's turned, it's a product you spend a lot of time on that doesn't add a lot of value, but we're well aware of it and we're certainly looking at it.

Thank you.

Your next question is a follow-up from the line of Rich Kwas with Wachovia.

Hi, Keith.

Just a follow-up on the $50 million to $85 million, is there some assumption there regarding the warehouse facility costs embedded in that?

That's basically taking the entire balance, the 1.2, and saying that that's what's going to have to be refinanced at our best estimate of a range of what market rates will be when they get refinanced and so the warehouse facility is what's going to be left over after the securitization for what was at year end, and then obviously, we haven't given guidance for next year because Tom said many times it's very volatile out there.

Okay.

But it would include what your estimate is for the public cost as well as what you expect the warehouse facility is going to come in at.

Absolutely.

Regardless of -- it was all in the warehouse at the end of the year, and it's really related to that balance as of the end of the year, $1.2 billion.

Okay.

Okay.

Great.

Thank you.

Thank you, Rich.

There are no further questions at this time.

I would now like to turn the call back to management.

Well, I'd just like to thank everybody for joining us.

Most importantly, I'd like to thank our more than 13,000 CarMax associates.

We did a good job managing our business in the fourth quarter, but the dedication of our employees is what continues to separate us from the competition, and I believe it will carry us forward from here.

So thank you once again for joining us and we'll talk to you next quarter.

This concludes today's conference call.

You may now disconnect.