車美仕 (KMX) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

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

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

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

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

(Operator Instructions).

Thank you.

Ms.

Kenny, you may begin your conference.

Good morning.

Thank you all for joining us today.

My name is Katharine Kenny.

I head up Investor Relations at CarMax, and this is our fourth quarter earnings conference call.

I guess I should also say Happy April Fools Day, but one thing we will not fool you about, and that is our last quarter with gain on sale accounting.

On the call with me 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 that involve risks and uncertainties that could cause actual results to differ materially from our expectations.

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

For additional information on important factors that could affect these expectations, please see the Company's annual report on Form 10-K for the fiscal year ended February 28th, 2009, filed with the SEC.

Tom?

Good morning, everyone.

Thank you, Katharine, for that witty introduction.

Well, despite the challenges we faced this year due to the recession, we're very pleased to report fiscal year results for CarMax.

I mean record fiscal year results for CarMax.

I want to thank all of our associates for their commitment in helping us achieve these results.

During the year, we had several note-worthy accomplishments and I'd like to list just a few of them.

We improved our margins on both retail and wholesale vehicles during the year.

We improved our sales execution or conversion rates, so that's the percentage of customers who walk in the door, how many of those buy a car from us, we improved that during the year.

We increased our inventory turns for the full year.

At year end, we have now achieved a total sustainable reduction of approximately $200 per car in reconditioning costs.

This includes the $100 we previously announced in June.

We did that while at the same time improving our quality as measured by our 30 day comeback ratio and our customer surveys.

We also aggressively controlled our SG&A expenses and we not only reported a record year at CAF but we also successfully navigated the most difficult credit environment in our history.

Additionally, we increased our market share by over 10%.

Now let me talk a little about the fourth quarter.

Total revenues increased by 25% and comp store used unit sales increased 12%, compared to a decrease of 26% last year.

Net earnings doubled to $75 million or $0.33 per share compared to $37 million or $0.17 per share in the fourth quarter of 2009.

Let me briefly review our key financial results for the quarter in a little more detail.

First in sales, improved traffic and sales execution contributed about equally to the 12% growth in comp used unit sales which was also a reflection of our easiest comparison of the year.

The 24% increase in used vehicle revenues was mostly driven by the growth in sales, but also a reflection of the 10% increase in unit price.

On the gross profit, as you saw, our used vehicle gross profit per unit has now remained above $2,000 for five consecutive quarters.

There are several factors that contribute to our solid fourth quarter gross profit performance.

As I mentioned earlier, we continue to make progress in decreasing our per vehicle reconditioning cost, which obviously helps our ability to achieve margin.

The year-over-year increase in wholesale valuations continue to provide a gross profit tailwind throughout the year.

We talked about that in the past.

It's the most unusual year for appreciation in the wholesale business that we've ever seen.

Higher wholesale prices positively impacted our appraisal buy ratio, which rose above 25% in the quarter and increased our inventory self sufficiency, which also supports our margin.

These factors going forward will all have impact on gross profit, but remember, we have direct control on only one of them.

The wholesale marketplace for vehicles is uncertain, and as we have seen can be very volatile so we will continue to evaluate the marketplace and assess strategies that will allow us to optimize sales and profitability in the future.

I'll now turn it over to Keith to review CarMax's Auto Finance results.

Good morning.

CAF's total income this year more than doubled over last year's fourth quarter, primarily due to over $26 million in favorable adjustments related to loans originated in previous periods.

The primary drivers of this quarter's adjustments included favorable funding for the cost of loans that were refinanced in the term securitization during the fourth quarter, net favorable valuation adjustments, including a decrease in the discount rate assumption and mark-to-market write-ups in the value of our retained subordinated loans, which now have fair value of $249 million.

The mark-to-market write-ups reflect continued narrowing in the automotive ABS spreads that has occurred over the last few months.

CAF's gain on loans originated and sold totaled nearly $16 million in the fourth quarters of both fiscal 2010 and 2009.

This was due to several factors.

Our total loan volume increased for the fourth quarter of 2010, due to higher sales.

CAF's loan penetration, which by the way is generally seasonally the lowest in the fourth quarter, was approximately 28% in both fourth quarters.

However, the impact of these higher sales was offset by a decline in the gain percentage in the fourth quarter of 2010.

This was primarily due to the combination of decline in average interest rates charged to consumers, and somewhat higher funding costs in our warehouse facility, compared to last year.

As most of you are aware, effective March 1st, we adopted new accounting rules for CAF which require us to account for term securitizations as secure borrowings going forward.

In previous years, we accounted for these transactions using gain on sale accounting.

On March 1st, we also amended the terms of our warehouse facility and will as a result consolidate both the term and warehouse securitizations and the related nonrecourse debt on our balance sheet.

We expect the cumulative of these changes to result in a $3.7 billion increase on assets, and a $3.8 billion increase in total liabilities.

In order to assist our shareholders in this initial adoption year, we provided an estimated range of tax contribution in fiscal 2011 of $145 million to $185 million in this morning's press release.

Our forecast for next year reflects the recently improved interest margin, defined as the difference between consumer rates and our ultimate funding cost for our recent term securitizations.

For assets currently in the warehouse facility and new originations, we are assuming that interest margin begins this fiscal year at current high levels but gradually returns to more normal levels by the end of the year.

We also assume that when we renew the warehouse facility this summer our funding cost, i.e.

the benchmark rate plus the spread will be more reflective of current market conditions than is now the case.

Currently it is more expensive than the public market.

In addition, we assume the continued stability in the auto ABS market.

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

Tom?

Thank you, Keith.

Turning to SG&A, compared to the fourth quarter of fiscal 2009, SG&A expenses increased only modestly in the fourth quarter of fiscal 2010, despite a 13% increase in total used unit sales.

For the full 2010 fiscal year, we were successful in significantly reducing our SG&A cost which we considered prudent given the tough environment.

However, in the current fiscal year, we are actually hopeful that some components of SG&A such as variable selling expenses and advertising will actually increase because this would be reflective of an improving sales and economic environment.

We will also begin to invest again in growth related expenses such as preopening and advertising for new stores and rebuilding our bench strength.

Also, assuming no economic deterioration, we also plan to invest in some key initiatives to continue to enhance the CarMax model.

Those include continued improvements to CarMax.com, as well as several other big IT projects, and additional training for all of our associates.

In closing, we are pleased also to announce our intention to restart store growth.

As I've indicated in the past, our decision to restart growth would be based on improvements in sales and credit.

The credit markets have obviously improved dramatically in the last year and our sales have increased steadily throughout.

While sales are not back to pre-recession levels, the positive trends that we've seen and our strong profitability have convinced us that moving forward with a measured plan for store growth over the next few years is the appropriate strategy.

We believe this pace will allow us to maintain the momentum we have achieved with our recent successful initiatives to increase efficiency and reduce waste while at the same time improving the quality of our consumer offer.

So our plan for this year is to open the three stores we previously announced.

Those stores in Augusta, Dayton and Cincinnati will open in May and June of this year.

Our current plan is to follow those openings with three to five stores in fiscal 2012, and five to 10 stores in fiscal 2013.

Lastly, I'd like to once again express my thanks to all the CarMax associates for their commitment and for everything they did to help us achieve these phenomenal results.

Now, Keith and I would be happy to take your questions.

(Operator Instructions).

Our first question will come from Jaison Blair with Rochdale.

Thank you for taking my call.

I was wondering if you could walk us through a little bit of the finer points of the math with the fiscal 2011 CAF income estimate.

My understanding is that the net interest cash flows, they can ebb and flow, based upon the timing of origination, losses in the portfolio and obviously, also, your expectations about the interest spread.

However, generally, my understanding was that it could proxy for the cash flows of that -- the portfolio receivables had been -- sorry, the cash flows of the portfolio receivables which had been running about the $95 million to $97 million, plus interest on the sub bonds of $25 million to $26 million plus another let's say $1 to $2 million which would be the difference between fees and expenses which would get me to about $122 million to $125 million CAF pretax income.

So I'm trying to get a sense of how spreads are relative to a normalized level and how the 145 to 148 would compare with my math.

I think what he's asking is why is the numbers higher than his expectations.

If you looked at our last public securitization, the funding costs on that were extraordinarily low and yet year-over-year while our margin to consumers is down slightly, it doesn't nearly come down the amount that the funding costs have.

So we are near record level spreads that we've seen.

That includes what happened in the second half of this year and as I indicated we're starting at those near record levels and planning them to maybe get to normal by the end of the year.

And those spreads have a much larger impact than you might impact on the overall cash flow coming in and, therefore, the timing of the earnings.

The other thing is you have to look at the last really five years of originations and the sales going into it along with the combined spreads and I'm sure you tried to develop a lap schedule as we had to actually lay out all the details and the components of it, and the short answer is there's not an easy answer but I think that that's why we gave you a range, try to drive people to if you look at the middle of the range that's our best estimate and there are a lot of factors that could cause it to be different which is why we put a fairly large range around it.

And if the spreads were kind of let's say in the middle of the normal historical range, what do you think that CAF number would be?

Well, yes, I think that's probably a level of detail that we would want to actually do something more formal if we wanted to try to disclose what we thought changes in spreads would do going forward and that's not out of the realm of question, it's just difficult to do.

We obviously know ourselves what a 50 bip change in spreads might do to a year's earnings, but again, that's -- if you think about it again, the majority of the earnings are already baked in for prior year's originations, so changes in spreads and sales don't have the same impact as they would have under gain on sale accounting because they're spread over the future years.

It's certainly a 50 bip change in spread would be several million dollars.

That's probably the best direction I can give you for now.

If I could just ask one follow-up.

If you could talk a little bit about the impact of the Toyota recall in the quarter.

Sure.

I'll do that, Jaison.

Thank you.

At the time of the announcement, when Toyota issued their stop sale, we immediately pulled all that inventory off our lots.

At that time, the percentage of our total used inventory, that was made up of that product, was actually less than 2%.

So we do have two Toyota stores and obviously their sales were impacted more dramatically, but that impact was not material for the Company.

And then even on the used side, where that was less than 2% of our total inventory, we got those cars out, pulled them out and put them in reconditioning until they were fixed and then put them back out and offered them up for sale.

The net impact in the quarter was immaterial.

Even the net impact of halo effect on the brand?

Well, you can -- if you look at some external data and our internal data would confirm that Toyota has absolutely taken a hit, and even in the wholesale markets we've seen some signs where as other product has appreciated, Toyota really hasn't moved very much.

So we have seen a little slowing there, but one of the best things about our CarMax model is we're spread across a whole bunch of different brands an when we look at it in aggregate we don't really see a material impact for us and more than likely those sales are picked up across lots of the other brands.

So even if we see a slowing of one brand, we're able to adjust very quickly.

As we have said in the past, we manage our inventory on a weekly basis.

If we see one segment slowing and another segment picking up, then we adjust our buying accordingly and we were able to do that very effectively in the quarter.

Okay.

Great.

Thank you so much.

Our next question will come from the line of Sharon Zackfia with William Blair.

I had a few questions.

Tom, you mentioned that your appraisal buy rate went up in the quarter and I guess I'm just curious, I know that during the recession your sourcing viewed a little bit more toward auction versus the consumer appraisal lane.

Are you back to over 50% getting source from consumers or are we still less than that on a historical rate?

No, we're not back yet but we've seen -- that number, that percentage is driven by two things, the appraisal traffic and then the appraisal buy ratio and also really the flow of product whether it comes in as wholesale or retail vehicles and what's been great through the years, we've seen a very positive trend in both our traffic and our buy rate and as I mentioned in the opening, that number did move during the quarter and we have seen self sufficiency go up, but it is not back to 50% yet.

But it's moving in the right direction and that feels great.

Good.

Do you expect it to get there this year?

I mean, do you think that's within the realm of possibility?

It's kind of unclear how far you've dipped.

It's a little hard for us to tell and again, I go back to what I would consider the beauty of the way we manage our inventory is we don't really have to project that going forward.

We would be hopeful that that trend would continue and that we would see some more normalized movement in the wholesale market but it's just really difficult to predict with all the movement and volatility we've seen so far.

So we're hopeful it will keep moving in that direction but if it doesn't I feel confident in our ability to manage through it.

Separately on SG&A there were a lot of allusions in the press release about resuming growth and reinvesting in the business and so on.

What is the right pace of SG&A spend?

I mean, you used to grow your SG&A in the double digits on a year-over-year basis and I think fiscal 2009 we were low single and obviously went down last year.

Are you looking at a low single digit rate of SG&A spend on a dollar basis or can you give us any kind of guidance to that?

Yes, as you know, we're kind of out of the guidance business and the allusions you saw in there were intentional.

We do expect to get back to spend some of the SG&A dollars that we cut.

To be real honest, last year we aggressively cut SG&A.

When you look back at where we were in November, December, January last year, it was pretty scary looking forward and I think we probably cut some areas a little too far.

I mentioned building back bench strength.

That's an area where we went a little deeper than we should have.

We took a huge amount of advertising.

Our expectation is that this year we'll spend more in advertising and we'll do that and it will generate additional sales.

The good thing about advertising is it's a lever and you can move it up and down throughout the year.

We're not giving any guidance on SG&A, but we had a good year from a profitability standpoint.

We intend to start spending some money back on some things that we held off last year.

In our IT area, we really just maintained where we were last year and we have a lot of things that we think we could spend money on and invest in that will help the business long-term and we're going to get back to investing in some of those things but it would be very difficult to give more specific guidance than that.

And then lastly on reconditioning, where did you get the extra $100 per car?

Was it a lot of little things?

What do you think the opportunity is from here to continue to improve reconditioning?

Well, I think when we started this initiative, real aggressively, it was about a year and-a-half to two years ago and we thought there was approximately $300 of savings to be had.

I can't tell you how proud I am of our teams to have achieved what they have in such a short period of time.

We thought it would take us four or five years to get to that number.

We've now achieved what we are confident is sustainable, $200 a car.

That's the other point I want to make on costs.

People tend to focus on SG&A.

We look at cost in total.

$200 a car across 350,000 cars last year, if you project that forward, it's $70 million of sustainable savings and sustainable margin availability for us that we are now confident we've achieved.

In terms of how much is left, you know, we still feel good about that number approximately $300, but I also believe that we knock off some of the easy stuff early and each incremental $5 or $10 per car is more and more difficult.

So I think there's more to be had but we've accomplished a lot in a very short period of time.

Okay.

Great.

Thanks.

Thank you.

Our next question will come from the line of Simeon Gutman with Credit Suisse.

[--shed some light to frame the discussion on] new vehicle incentives.

I realize there's no hard and fast rule to this.

We're still in unprecedented time.

Both from a demand side and potentially a pricing side, because I think even in the past we said used vehicle pricing is as much a function of new vehicle sales as anything, so curious if that poses any risk given what we've seen last month.

I missed the beginning part of what you said.

Did you say -- what did you say about incentives?

We couldn't hear you.

New vehicle incentives in light of what happened last month with Toyota and some of the other brands.

New vehicles, in terms of aggressive new vehicle incentives, we've been dealing with that for 15 years.

I don't think this is some wildly unusual period of aggressive manufacturing incentives and as we said multiple times, every time there is a big push on incentives and it actually works to drive consumers into the marketplace, in the past we have benefited.

We would like to see the SAAR go up.

We would like to see new car sales go up because I think it shows that consumers are back in the marketplace and back willing to buy a car and our average retails are north of $17,000, and almost always require a loan.

I think it's a similar type customer.

And although manufacturers get aggressive with incentives, we have found that when consumers go out, oftentimes they get real excited to buy a car, they find out for whatever reason that incentive didn't work for them and they turn to us.

We aren't worried about new car incentives.

We actually hope they work in driving consumers into the marketplace.

Is there any chance that given that we have -- we've had an unprecedented rise in used vehicle pricing, that if new vehicle sales does grow or does rob some of the growth from you, and I'm saying that by chance, that that used vehicle price inflation can be disrupted?

You mean that the two to get too close?

Yes, or that at some point that it just stops the ongoing price ascent that we've seen in used, if used to some degree takes a hit?

To me, that's all supply and demand.

As I said earlier, if the incentives drove a significant amount of consumer demand it would offset the price increase that we've seen.

I think it's a pretty efficient marketplace.

I think it's proven to be over the years and I think it will be going forward.

And then can you shed some light on the Santander agreement.

The expectation that it would at least fill percentage of the loans that CAF had tightened, and then that it would drive top line hopefully by several hundred basis points or so, just curious how that went and whether that relationship has been extended.

We did extend it for another period for 90 days, on more favorable terms and it's doing exactly what we expected.

Recall that at the beginning of the second quarter, CAF ended up walking away from that space of loans and they're actually buying that piece that we walked away from.

CAF is still participating in a small percentage of that but Santander is actually getting the vast majority of those loans.

One last follow-up on the SG&A question.

Realize the guidance will be limited, but is there any differences in timing at which point some of these initiatives may start or may come in or is it steady?

Just as far as modeling goes.

I couldn't give you much more detail.

It's really spread throughout the year.

When you get into a couple of the components, like I talked about a few things around store growth, those obviously will happen as the stores open, the three stores that we currently have this year.

We'll have some in there toward the end of the year to start preparing for the three to five stores that we'll open in the next fiscal year, and another one to think about is as I mention is advertising.

We can kind of ebb and flow advertising with sales and then with management bench strength build-up, that will just go as quickly as we can hire up.

So that would be spread more throughout the year as well.

Okay.

Thanks.

Our next question will come from the line of Ivan Holman with RBC Capital Markets.

Good morning.

This is Ivan sitting in for Scott.

Congratulations on a nice quarter.

I just wanted to ask a quick question at first on the CAF guidance that you gave, just a housecleaning item.

That does not include any favorable adjustments such as the ones that were recorded this quarter; correct?

Is that just a straight operating number.

That's our best forecast that wouldn't include any adjustments going forward.

Most of the adjustments we used to have won't exist under the new accounting.

For example, we won't have a mark-to-market issue or other issues that currently exist.

Okay.

And another question with regard to the store growth.

We've seen basically this is your third quarter of positive comps, essentially, and it looks like the store growth is restarting on a good moderate kind of growth trajectory.

What do we need to think about in terms of the model?

What do you need to see before you start to ramp up that store growth?

Well, in terms of what we'll talk about today, it's the stores that we've laid out, what we need to see is more sales.

So despite the fact that we have seen -- if you tracked the last three quarters on comp used unit sales, plus 8, plus 8, plus 12, this last 12 is against a negative 26.

If you remember back a few years ago, whenever we would get asked where were you to your model, we had said in aggregate we were pretty much at our model.

Well, that's 14% higher sales than what we're currently seeing.

So sales are not back where they used to be and it feels great that we've had a good financial quarter, feels great that we've seen some positive sales trends but we're a long way off from where we were just two years ago.

I guess kind of rephrased, is there any particular threshold you would need to pass over in terms of comps either in a two year stack or normal one year comps that would allow you I guess to shift gears, pardon the puns, in terms of store growth?

We don't have a target number.

I'll just tell you we're constantly evaluating it.

We look at it every month.

We look at it every quarter.

We look at a whole bunch of different factors, not just -- I mentioned sales, but as I said, there's sales, there's credit, there's our margin management, how much of that can we count on in the model going forward.

There's changes in consumer behavior.

I talked about the new car number earlier, the SAAR, if that went up, that might be an indication that we think would provide positive momentum going forward.

So there is no one lever.

There's a combination of several factors.

All right.

Thank you very much.

Thank you.

Our next question will come from the line of Craig Kennison with Robert W.

Baird.

Good morning and thanks for taking my question.

I'm going to ask sort of the rare long-term question, give you ten years to think about it, but how many stores can this business model support long-term?

Well, we have never varied off of our rather wide estimate of 200 to 300 stores.

I don't think anything about this recession or the difficult environment that we just worked through has changed our long-term estimate of what this business can ultimately be.

And we still believe that there's opportunities for us to figure out how to get into smaller markets and figure out how to do some things that prior to the recession we had talked about experimenting more significantly with, which clearly we're not doing those things now.

So I think it's a big number.

We're only in 45% of US markets.

We have a very small market share of one-to-six-year-old used cars.

We're just as optimistic about our long-term prospects as we were pre-recession.

Given that optimism with which we would agree, actually, why not be more aggressive at what seems like the bottom of the cycle?

Yes, I actually think this is -- one of the things that I mentioned in the -- in my opening was how important we believe it is to maintain momentum, improving efficiencies, lowering costs.

The $200 of savings in reconditioning we've achieved in the last year and-a-half is hugely impactful to the model going forward.

If we were to take that into margin or if we used it to drive incremental sales, so we just -- we want to make sure that we're careful, that we don't distract the entire organization by jumping back into 15% growth and losing momentum in those other areas.

The other piece is, building stores is a pretty long cycle time.

And when we said at the end of last year that we quit growth, we really quit growth.

I mean, we stopped all money and all investment related to store growth and it does take a while to get that engine back up and running again.

I think this pace is reflective of that.

But it's also reflective, as I said earlier, of our -- how important we think it is to continue to improve our efficiencies and our business.

Thanks.

And last question, on the strong comps you reported, could you see proportional improvement across all credit tiers or did prime compare differently than subprime.

Well, for the fourth quarter specifically, we mentioned that we had a higher percentage of subprime business than we normally see in the fourth quarter and the fourth quarter is normally our highest percentage of sales in that area anyway due to seasonality.

So I would say it's probably a little higher on the lower end.

Do you think that's more a function of traffic at that level or just credit availability at that level?

I think that's exactly what happened is if you recall, is our other lenders above the subprime area had the same economic challenges we did, and they had to tighten and so more customers are being now routed to our subprime provider, and then the other element is that our subprime provider has done a great job of getting comfortable with the CarMax model and I think has also been more aggressive about buying customers.

So the combination of those facts has really moved more to the subprime and the seasonality this time of the year.

Thanks and congratulations.

Thank you.

Our next question will come from the line of John Neff of Akre Capital Management.

Hi, thanks very much.

I was just wondering if you could walk through the math behind your statement that you believe you've increased market share by 10%.

Thank you.

Yes, we talked about market share in the past.

There isn't great external data out there and the way we measure market share, we buy actual DMV registrations.

We take those registrations and we even buy our own data and then we compare that -- we compare those sales.

In almost all of our markets, we're in 45 markets, we have data in close to 40 of those.

We take that data and we compare only our one to six-year-old sales compared to the one to six-year-old sales in that market and then we simply just measure the market share.

The reason we went to an annual number is there's a lot of volatility in that number.

The month to month data can be very inaccurate, but we feel good and we feel confident that over a year's time, it's a pretty accurate reflection of the changes in the market of one-to-six-year-old cars and the changes in our share.

So for the full year, we achieved more than a 10% share gain in one-to-six-year-old cars sold in those markets.

Thanks very much.

Sure.

Our next question will come from the line of Matthew Fassler with Goldman Sachs.

Good morning to you.

First question I guess for Keith relates to credit.

Can you try to help us quantify the interest spreads that you're seeing today and what the components are, at least at a high level?

Meaning what the spread is between what?

I mean, our current overall APR is --

10.5.

It's about 10.

And if you look at the cost of the last deal, just a second.

Why don't we go on to the next while he looks it up and we'll come back to it?

Okay.

That's helpful.

Secondly, now, Tom, obviously the reconditioning savings that you've generated are bigger than what you had -- I guess maybe not bigger than what you expected to get, but you're raising the level.

Do you think that gross profits per car of around $2,000 should be essentially be the new benchmark, whether or not we see volatility in used car prices.

That's always the multi million dollar question for us.

It's really not an easy one for us to answer.

I think that as we've said before, if we could find -- if we felt like taking those dollars and reducing our prices by that full amount would drive the sales that would more than pay for it, we would rather have the sales.

I've talked about the unusual dynamic over the last year and-a-half where in an appreciating environment, aggressively cutting your prices when you have to turn around and go pay more for the same car didn't really seem to make a lot of sense.

We have tested various pricing.

We just think the elasticity around price has been a little different in the last year and-a-half.

So I think as I mentioned, we've had some tailwind from margin achievement.

What I'd like to think is as we continue to find ways to save money, that we'll be able to do both, put a little into margin and put a little towards driving incremental sales and both the consumer would benefit and we would benefit from a margin standpoint as well.

That's kind of our plan going forward but we don't really -- I don't really have a target for you to say $2,000 is the way to go going forward.

As I mentioned, it's five consecutive quarters but I think it's the only five quarters we've ever had at $2,000 margins.

And if we see changes in the wholesale marketplace and we see changes in some of the things that have provided those tailwinds, then it would be more difficult to achieve.

And is the kind of wholesale pricing environment that we've had over the past couple months, has been flat or up maybe very fractionally month to month adequate to maintain the status quo or do you think you would need to see more tailwinds for wholesale prices?

The last couple months aren't really going to help much with what happens over the course of this next fiscal year.

It's really what happens from here forward.

I think what we have really shown in the last couple years is our ability to manage through any appreciation or depreciation environment that the market has and we've seen, again, the most volatile environment we've ever seen in the last year and-a-half and I'm real proud that our inventory management model has allowed us to achieve good margins, achieve strong inventory turns and deliver great value to the consumer.

I expect to be able to do that going forward.

Honestly, we don't spend a whole bunch of time trying to figure out what the wholesale market is going to do throughout the year.

If it went back to a normal curve like we've seen in the past prior couple of years, it makes it a little bit easier for us just because it's a little bit more predictable but we're not worried about how volatile it is in terms of our ability to manage through it.

Got it.

Thanks so much.

Matt, in answer to your previous question, the consumer APR was just north of 9% and cost of funds is approximately 2%.

So you said that's 9% rather than the 10% you initially -- ?

Correct.

It's closer to 9 than it is 10.

Has that fallen over the last quarter or so?

Not dramatically.

Our next question will come from the line of Rod Lache with Deutsche Bank.

Good morning, everybody.

I had a couple of questions remaining.

I'm trying to reconcile the uptick in wholesale comps against still pretty weak used retail market outside of CarMax and I was wondering if you had any thoughts on the outlook for volume for you in that wholesale business, whether you think your sustainably taking market share away from auctions.

How should we be thinking about the outlook there?

We haven't put anything out in terms of what we expect for volume for the year.

As you know, the way our auction runs, it's simply the results of our consumer offer on the front end, where we make a cash offer on every car, regardless of whether that customer buys a car from us or not.

The components that deliver the wholesale volume are the percent of customers who come and get their car appraised that are driving a wholesale car and then our buy rate in that category only.

And as I said earlier, we have seen movement.

We've seen our volumes go up.

We've seen our buy rate go up.

But we haven't talked any about what our expectations are for the year.

We're hopeful that those two things continue to move, and we see an increase in volume for next year but again, we haven't guided around that.

Right.

You're still seeing weakness outside of CarMax in the retail used business and that's why it's obviously pretty impressive that your wholesale volumes are up that much.

I guess you're saying that it's more a function of the supply than the demand?

Well, I mean, I think it's always a function of both.

I think one of the reasons our auctions have been so successful is we continue to run pretty much an absolute auction.

So when we run our sales we have a 98% sell-through rate and I think dealers know if they come to our sale.

And again, it's a dealer only auction.

If they come to our sale and they're the top bidder they're going to buy the car and I think that's become more and more valuable in this marketplace.

I think we mentioned that our dealer ratio -- did we talk about the dealer ratio in the press release?

Our dealer ratio was an all-time-record for the year, so that's the number of dealers per car that we run at our auction, and that obviously can generate some additional enthusiasm.

So I think we do a great job running the auction.

I think we do a really good job with customer service for our dealers.

I think we provide an alternative and I think even if people's volumes have dropped off, similar to what we talked about with the lenders on the retail side, when people had to pull back on capital they didn't pull it back from CarMax because they like the way we do business and I think on the wholesale side, hopefully we have some similar effect there.

Where as dealers even if they pull back on their volume and stop going to auctions, ours isn't the one they stop going to.

Also, kind of a longer term question, is there any impact on your business model just in the next, let's say, long-term being maybe two or three years, just given the fact that the supply of these relatively new used vehicles is probably going to be constrained for a while, just given that the new car market in the US has been soft for two years and probably be soft again this year?

Well, I think we saw evidence of that this year.

I mean, I think this year, with the record appreciation throughout the year, part of that was not only are those new cars not in the marketplace, but the customer that was out there -- if you take the SAAR from 16.5 million down to 10, there's 6.5 million transactions that are missing, and a lot of those involve trade-ins and a lot of those trade-ins we find ourselves in the middle of.

So it's not just the product that's being sold, but it's the trade-in activity around it.

So I think we've worked our self through this year where we saw supply constraints like we've never seen before.

It's very difficult to predict what that will be going forward, because so much is dependent on what happens with new car sales from here, looking into the future, and I think most people are predicting that new car sales will increase from here and we're hopeful that that happens.

And just lastly, I know you're reluctant to guide to SG&A, but could you quantify perhaps some of the operating expense items that you've cut.

For example, when you discontinued your store growth, what were the savings associated with that, just to sort of give us some perspective on some of the things you're going to have to relaunch.

I'm not going to give much more detail than I already gave.

All the items that I already pointed out were the ones that we cut.

I talked about store growth.

I talked about bench strength.

I talked about advertising.

Variable selling expenses moves up and down with sales.

There's a number of different components there.

We feel like we aggressively managed them throughout the year, but that's about all we're going to say on it.

I gave you the big components there, but it's difficult to give specific dollar amounts.

All right.

Thank you.

Our next question will come from the line of Bill Armstrong with CL King and Associates.

Good morning.

With wholesale gross profit above $900 a car and the outlook for overall pricing looks like it will be sustained at least for a while, do you think that $900 gross profit per car is a sustainable rate that we can expect going forward?

I'd say probably not.

Again, that's a record ratio for us, dealer attendance, that's a big driver of price for us.

Again, we continue to see unusual curves in the wholesale market in terms of appreciation.

So I'd say probably not.

With supply still tight is it fair to assume that you have not seen any decline in the dealer to car ratio so far?

For when?

Recently, up until today.

Well, we're not going to talk about this quarter.

We gave you the number through what was it, February 28th, so we're not that far removed from that.

Okay.

With reconditioning expenses down $200, and looks like you might have a little bit more there to go, does it make sense to do any recon work on your wholesale vehicles and maybe squeeze a little more gross profit out of that?

Our experience has been the opposite.

We spend money on wholesale cars and you don't get it back.

They're wholesale cars.

Our average car in the auction is 10 years old with more than 100,000 miles and less than $4,000.

We consider reconditioning on those cars, running them through the car wash.

I knew that's how you have operated historically.

I was just wondering, since you've been able to get these costs down, if maybe this would have prompted you to take another look at that.

A lot of our savings in reconditioning as we talked about come from our cosmetic area, and that would be the last thing you would do on a wholesale car.

I see.

Okay.

We're not going to put them in the paint booth and slow our turns down.

The CAF income that you're projecting going forward, does that roughly approximate your cash income from CAF or would there be some adjustments we would need to make?

It's a pretty good approximation.

Okay.

And then finally, you're going to increase ad spend probably going forward.

Have you already begun to increase ad spend?

Well, we had some testing and some increases in the fourth quarter, which you may or may not have seen during the Olympics and the Super Bowl.

So we have spend up some and we feel good about our results.

And in terms of our projection for the year going forward, do we expect to spend more on advertising?

Yes.

But as I mentioned earlier, it's an area where we can lever up or lever down with sales.

Okay.

Great.

Thanks.

Our next question will come from the line of Will Truelove with UBS.

Thanks for taking my questions.

Really on the CapEx side, I no know you're going to open three stores this year and your CapEx guidance is $90 million versus $22 million last year.

You also mentioned you were going to spend a lot of IT and whatnot.

How much of the $90 million do you think will go towards the three stores that you're opening?

Are these three stores that you're opening going to be production stores or satellite stores?

Thanks.

None of the CapEx will go to the three stores we're opening.

Those stores were CapExed two years ago.

Those stores were built last summer, and we just chose not to open them.

All the expense around opening those stores this year is straight expense.

The CapEx number that we put out is to begin to start to build the pipeline again for future growth.

As we've said in the past, that's about a three-year timetable.

So we just wanted to put out a number that allowed us to deliver the plan that we just released.

Okay.

There is some maintenance in CapEx and there is some IT spend in CapEx as well.

All right.

Thanks.

That's very helpful.

Our next question will come from the line of Matt Nemer with Wells Fargo Securities.

Good morning, everyone.

My first question is on the topic of reconditioning.

Could you talk about what changed between the $100, and the $200 in savings, is it still just cosmetic or are you starting to get into the mechanics?

The change was approximately $100.

Right.

Is there anything kind of different that you're doing versus what you were doing six months ago?

Oh, yes.

I see what you mean.

Matt, we talked about this before, and I've talked with you about this as well.

We continue to find ways to get more consistent across the way we recondition cars, whether it's paint or touch-up or detail or parts or sublet.

There's lots of different areas of reconditioning, and we had had some pretty big inconsistencies across our stores.

So it's more of a continuation of the things that we had had already been working on, and as I mentioned, a lot of these savings come from cosmetics, and we're just real pleased with our results, but from the beginning of the year until now it's just continued improvements in those same areas.

Okay.

And then on the topic of gross profit per unit, obviously, the consumer environment seems like just in general it's improved a little bit over the last couple of months.

Do you feel like you're optimized at this 2,000 plus dollar gross profit level based on kind of what's happening in March or is there a chance that the optimal level is maybe a little bit lower than 2,000?

Again, I think there's so many external factors that go into that.

All I can tell you is we'll continue to test elasticity of pricing and when we -- if we thought that going down $100 would pay for itself in sales, we would do it in a second.

Again, we haven't really seen that level of movement over the last five quarters, but it all depends on supply and demand and what happens with the consumer and lots of other external factors, but I think we'll be working on optimizing sales and profitability forever.

Okay.

And then on to SG&A.

Is there an easy way to think about the cost of reassembling the growth infrastructure on a per store basis so the employee training, relocation, et cetera, per new store?

There is for us, but I don't know if there is for -- I don't know.

It's a little difficult, because of the time line and we really haven't given a lot of detail around the time line, because we don't have more details to give.

But it's a little easier to talk about it when prior to the recession, when we were opening, say, 10 stores, then 12 stores, then 14 stores, those expenses flowed a little bit more evenly, but to try to figure out on a per store basis how it's going to impact this year I think would be really tough.

I guess as a follow-up to that, do you feel like relative to the last time you restarted growth, which I think was 2001, maybe 2002, what could be different about this restart versus last time in terms of the dilution of the model?

Well, there's a couple differences.

One, we're going to start slower as a percentage basis.

I think another difference is we're better at it now than we were then.

We know how to open stores more efficiently.

And another piece and I think maybe the most impactful is we're a more efficient Company than we were there.

Just take this $200 we talked about a bunch on this call, that's a difference between -- last time we restarted growth we were actually operating in an environment where.

Now we're operating going forward on sustainable savings going forward, so I think we're much better positioned now to restart growth than we were then and we're going to go at a more reasonable pace.

We're also growing off of a bigger base.

Last time when we started growth our base was much smaller.

And now we have 100 stores and 13,000 employees, and it's a little easier to go off of a bigger base.

Okay.

That's helpful.

And then just lastly, you mentioned investments in IT and CarMax.com and I'm just wondering if you could give us a sneak preview of how the web experience might change over the next 12 months.

I don't know that it will change dramatically in the next 12 months.

When we talk about investments in our future they're usually a little longer term than that.

I'll give you an idea of some of the things we're working on at CarMax.com.

There's a lot of things the consumers would like to do with us online, that we currently don't have the capability to do.

We talked about transfers before.

Our transfers represent more than 25% of our total sales, are transferred at a customer's request.

A lot of those require the customer to pay for that transfer.

Sometimes they would like to -- we believe the customer would like to initiate those online and be able to pay, maybe pay with a credit card to get the transfer done.

Right now, we can't accept those payments online.

A number of other pieces, like an online credit application we currently don't do.

If you break out the various components that go into a selling a car and try to visualize us wanting to do as much of the transaction online as the consumer wants to do, and then breaking those off into chunks, I think that's kind of the bigger things that we're thinking about in the next couple of years.

Great.

Thanks very much.

Best of luck this year.

Thank you, Matt.

Our next question will come from the line of Scott Stember with Sidoti.

The CAF for next year, you talked about not having any valuation adjustments under the new accounting.

Could you talk about the mark-to-market on the sub bonds?

Just the fact that the market got better.

I mean, it's been -- it's amazing, if you think back a year ago, if you look at our 2009 securitization, we had to put 17% of the Company's capital in it.

This last deal we had to put a quarter of 1% of the Company's capital.

I think that reflects just what's happened to the overall marketplace.

Accounts came in for a reason.

Our last two deals have been without CAF because the ABS market's gotten so much stronger.

And we actually have to go out and get ratings or adjustments on what the valuation would be.

But those are just relatively fine-tuning the marks, given the strong credit environment.

So going forward, we're not expecting the material movements we've seen over the last few quarters?

Correct.

Okay.

And as far as the new stores that are opening, you talked about the flow stores with regard to reconditioning.

Could you talk about the additional incremental gain that you could see on gross profit dollars as you roll out this new process to your new stores?

Well, as I think I said this last June when we talked about our savings, the savings we achieved in reconditioning, we achieved across the whole chain.

That's true in our Flow stores, and what we call our traditional stores as well.

We have also said that all of our stores going forward would be opened under the flow format.

In terms of the impact to the economics, that will be more driven by the savings that we get across the chain.

But every store will be opened in the flow format going forward and of the three stores, one is a reconditioning store.

All my other questions have been answered already.

Thank you.

All right.

Thanks.

(Operator Instructions).

And we do have a follow-up question from Jaison Blair with Rochdale.

Thanks for taking my call again.

Is the interest income on the sub bond, is that included in the 145 to 185?

Yes.

Okay.

The 9% APR and the roughly 2% cost of funds, that's on current --

that's a reflection of what we expect starting at the beginning of the year.

So what's currently in the warehouse, we think that when it goes to the next public deal, it will be financed at somewhere around that 2% cost, and that we actually then say that we think somewhere over the year there will be compression, and we'll get to a more normalized spread.

And your more normalized spread is roughly 4, 4.5%?

Yes.

Okay.

And your current spread on the portfolio, do you have that?

Well, on the portfolio, the APR is slightly over 10.

I don't know what the weighted -- we'll have to get back to you on that.

Okay.

Great.

Thank you.

Thank you.

We have no further questions at this time.

All right.

Thank you, and we'll talk to you next quarter.

Ladies and gentlemen, this does conclude today's teleconference.

You may all disconnect.