車美仕 (KMX) 2011 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Q3 FY '11 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.

It's Katharine Kenny.

Happy holidays.

It's cold here, but it's sunny, and it's going to be 45, so we're happy.

We're also pretty happy about earnings this morning.

Thanks for joining us on our third quarter earnings conference call.

On the call with me today are Tom Folliard, our President and Chief Executive Officer, Tom Reedy, our Senior Vice President and CFO, and Keith Browning, our Executive Vice President, Finance.

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 28, 2010, filed with the SEC.

Now I'll turn it over to Tom Folliard.

Thank you, Katharine.

Good morning, everyone.

Thanks for joining us.

Well, as you saw, we just finished up a record third quarter for CarMax.

We're very pleased.

Our 16% increase in used unit comps was driven by a continued rebound in customer traffic, and an improvement in sales conversion, partially due to increased consumer credit availability.

This quarter's results showed sustained strength in many of our key areas, compared to the third quarter of last year.

Total gross profit for CarMax increased 23%.

Gross profit per retail unit increased by $127 year-over-year.

Our wholesale business has also continued to outperform.

Wholesale unit sales increased by 26%, again due to higher appraisal traffic, and an improved buy ratio, which remained at similar levels to last quarter at nearly 30%.

And our wholesale vehicle gross profit per unit grew by $51.

CAF income of $56 million also supported our very strong performance.

I'll now turn it over to Tom Reedy, and he'll discuss a few highlights from our finance area.

Tom?

Thanks, Tom, and good morning, everyone.

CAF income remains strong.

Our portfolio continues to benefit from a relatively wide spread between APR and cost of funds, which as you know gets locked down on the loans we originate and securitize in the public market.

This has been the case for the past several quarters, and continued with the $650 million 2010-3 transaction that we closed in early November.

Loan loss experience has also trended a bit better than our expectations, which is reflected in the current quarter's provision and ending allowance for losses.

As you saw in the release, we believe credit availability helped sales in the quarter.

As we mentioned in September, credit availability was somewhat impaired last year because CAF had tightened lending standards, and we did not introduce the program where Santander purchases a large portion of CAF loans that we used to originate until mid-November 2009.

This year, we added a similar arrangement with Wells Fargo, which has been in place for all of Q3.

Unlike the Santander arrangement, which focuses only on CAF's lower tier credit customers, the Wells Fargo program considers financing opportunities throughout the full spectrum of customers that CAF approves.

As far as credit mix, we continue to see a higher portion of our sales financed by our subprime lenders.

Subprime represented approximately 8% of our sales this quarter versus 6% a year ago.

One last remark regarding the balance sheet before I turn it back over to Tom; we did end the quarter with significantly higher levels of inventory.

While this is largely due to an increase in sales, and our solid results, those results have also made us confident to build inventory in line with more normal sales levels, something we were hesitant to do during the recession.

Tom?

Thank you.

I'll mention just a couple of other points before we open it up for questions.

With the growing trend among consumers of doing more shopping on handheld devices, we have recently enhanced our website by launching a new mobile version.

It's a streamlined version of CarMax.com that allows customers to search for and view cars on their phones, as well as easily find and contact our nearest store.

We're very excited about this next step forward in making it easier for our CarMax customers to find the perfect vehicle.

Let me note that in addition to the three store openings for fiscal 2012 that we announced last quarter, we have this quarter reported on our planned openings for the third quarter of next year in North Attleborough, Massachusetts, which will be our first store in the Providence market.

Lastly, I'd like to highlight an important milestone we recently achieved.

For the first time ever, we have recorded over $1 billion in annual wholesale vehicle sales.

This is a team effort across all of our stores, and all of our corporate functions, and I'd like to congratulate all of our associates who have helped us build such a successful wholesale business.

And with that we'll open it up for questions.

(Operator Instructions).

Your first question comes from the line of John Murphy with Bank of America.

Hi, this is actually Elizabeth Lane on for John this morning.

In addition to the improved credit availability that you noted, are there any other drivers of the increase in the pace of customer traffic that we should make a note of, including consumer confidence or better advertising?

Well, really, when we looked at credit availability, that's different than what we consider a traffic draw.

That's something that helps the conversion of the traffic that we get.

Okay.

So, we've seen a nice trend here over the last few quarters of increased traffic and increased sales.

And credit availability is just a piece of what helped the sales for the quarter.

And we talked about advertising going up at the beginning of the year, commensurate with sales, and we've done that.

Okay, great, and what's the price elasticity of demand that you're seeing at this point?

And is there some room to ultimately take price, will cutting price drive higher volume?

And would you think that an extra $100 out of gross profit per unit would materially impact volume at this point?

We don't, and if we did, we would do it.

Yes.

So, as we've talked about over the last several quarters, we haven't seen elasticity the way it was pre-recession.

And although things are kind of slowly getting better, we really haven't seen a big movement there.

Yes.

And this one is probably for Keith, but from the monthly cash statements that have come out, it looks like the pool factors have been coming down a bit more slowly month to month for each securitization than in the previous years.

And do you think people are paying off loans a little more slowly than they used to, at the longer end of the curve?

And does that then result in a higher pool size and higher CAF income?

That's clearly the case.

We've actually seen customers delay that.

And I think that just kind of goes hand in hand with the SAAR, that people will pay off their loans when they're buying a new car or a new used car, in our case.

And all loans are paying off, and yes, that does translate into a little bit higher income for CAF, but marginal.

And when do you expect that to change over time, if people start pre-paying a little more quickly?

Yes, I think when SAAR comes back, we'll see that go back to its normal levels.

Okay, thank you.

Thank you.

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

Hi, good morning.

Hi, Sharon.

Just a quick question on the Wells Fargo (technical difficulty) the loans, or how is that working?

We lost your question there, Sharon, I'm sorry.

Can you hear me now?

Yes.

On the Wells Fargo arrangement, are they using the CarMax scorecard, or are they using their own scorecard to approve loans?

Yes, the Wells Fargo arrangement, Sharon, is similar to the Santander deal, where they're using the CarMax scorecard for originations.

The difference is that Wells Fargo, as we discussed, is buying a segment of the business that represents kind of a full scale of what CAF is approving, versus just the bottom half.

If you think of it as like a vertical slice of credit tier as opposed to horizontal.

Okay, can you remind us at this point then, how many third party lenders you're using?

I know it's been kind of a moving mix over time.

Are we at like four or five at this point, or --?

Yes, sure.

Let me just kind of walk through what we're doing in the stores.

I guess the way to think about it is really kind of threefold.

First off, we have CAF, which as you know, gets the first look, and their originations represent about 35% of sales today.

And then next, we have Santander, Wells Fargo, and Cap One, who participate in originations that they approve themselves.

And then, with regard to Wells Fargo and Santander, also participate in the program where they're originating or buying loans that CAF has approved through their scorecard.

That represents just under 30% of sales.

And then the remainder's going to go either to subprime, which we said is about 8%, the vast majority of that being Santander or other, which is 25% plus in general.

And that's getting done with financing arrangements that they get outside of our system, so somewhere besides our stores.

Okay, great.

Thank you.

Your next question comes from the line of Matt Nemer with Wells Fargo Securities.

Good morning, everyone.

Hi, Matt.

So on the -- if you could just comment on the gross profit per unit, it looks like it followed a fairly normal trend from Q2 to 3Q, and that it's typically down, other than the last few years, it's typically down a little bit.

But is there anything going on in the mix or margin availability relative to recon or anything else that you can comment on?

No, it's actually -- you kind of said it when you started.

It's follow a little bit more of a normal seasonality curve for us.

And as you said, the last couple of years we really haven't seen that.

So, we're really pleased with the margins that we've made for the quarter.

Although sequentially, they're down from the second quarter, they're up pretty substantially over last year's third quarter.

Again, we're really pleased with the margins that we made.

But it is following a little more of a more normal seasonal pattern.

If you looked at the five years prior to the recession, it's kind of in line with that move.

And then on the higher inventory levels, is this similar to the inventory expansion test that you did a few years ago?

Could you give us a little more color on which stores are getting the extra inventory?

Is it across the board?

Yes, it's actually the same answer as the last question.

Our sales are up 18% in total.

Comps 16%, sales up 18%, so that -- if our inventory just moved with that, we'd be up 18%.

Some of the rest, or almost all of the rest, is another normal seasonal build for us.

Which, if you recall on the last couple of conference calls at this time of year, we've been reluctant to go out and buy up heavily in the holiday months, November and December, when historically that's what we would really do.

We'd get out there and really build inventories, partly because there's a lack of availability of auctions being open because they have more closures around the holidays.

There's a lower sell-through rate at the auction, so it's a little more difficult to build.

And we expect our sales in a normal seasonal year to pick up in January and February, so we actually have to start building our inventories now.

And if you looked at four, five years prior to the recession, you could see that pattern in our inventory, and that's what that reflects.

It's, again, a combination of the sales increase, and then our normal seasonal build that we feel better about doing this year than we have the last two.

So, could you just comment on -- just to follow-up on that, could you comment on what impact that is having at the stores now in the last 30 or 45 days that you have more inventory seasonally than you've had over the last few years?

Does that improve conversion?

It's hard to attribute.

Again, you saw our traffic and conversion were both up for the quarter.

I couldn't tell you if it's because we had more cars, because we had more credit availability, because the market's coming back, because we did more advertising.

The answer is, it's probably a combination of all those things.

But again, this is a normal inventory build for us, just different than the last couple of years.

It'd be really difficult to say how much of our sales increase you could attribute to the inventory build.

I would say not very much, because we wouldn't have thought so in the years past when we built inventories.

And then just lastly, could you comment on, I know it's early, but just anything you're seeing in some of the tests that you're running on online transfers, online appointments, et cetera.

Yes, it's actually way too early.

And when I talked about it the last quarter -- at the end of the last quarter, that was probably a little earlier than we normally talk about tests, because it's only going to be in two stores, and we really haven't gotten up and running yet.

We're optimistic about those -- about adding that functionality for the consumer because we think it's in line with what the consumers want, but right now it's a little too early to comment.

Okay, fair enough.

Happy holidays.

Thanks.

You too, Matt.

Thanks.

Your next question comes from the line of Himanshu Patel with JPMorgan.

Hi, good morning, guys.

Good morning.

Just a quick question on the subprime penetration.

You mentioned 8% this quarter; I think it was 7% last quarter.

Where do you sort of see that going over the next couple of quarters?

Usually, we see it increase in the next quarter because we have got tax returns, and there's some seasonality to credit.

But as far as where we see it going beyond that, that's going to depend on what's coming through the door, and the credit quality of customers coming through the door, which has -- it's actually down year-over-year.

And we've seen that happen, and that's one of the reasons that we're up year-over-year from a subprime perspective.

It's not really controllable for us.

It's not something that -- we don't specifically advertise to a certain credit level, and the traffic flow we get is not as controllable for us internally.

And when we book a subprime deal, it's after that customer has been through every other possible avenue of credit availability for us.

So, although it's a less profitable transaction for us, we'll take all we can get, because we know they've gone through the entire suite of other credit availability that we have.

I guess just a broader question.

Do you feel like credit availability is at all hampering sales at this stage anymore?

No, I think relative to the past, we've seen it consistently getting better over the last couple of years.

And when we talk about credit availability, it's hard to pin down exactly what it is.

For instance, you can have an approval rate, where you're approving a ton of customers that come through the door, but if you're not giving them an offer that they're willing to accept, it's not doing anything to support sales.

And what we're seeing now is a combination of factors -- year-over-year we're seeing more customers apply for credit, we're seeing more approvals per customer in our system, and we're also seeing more favorable terms offered to those customers.

And we think all of that is coming together to help sales a bit.

Okay, and then just any updated comments on the outlook for gross profit per used unit?

You sort of talked about that moderating in the future.

Should we still think about something a little bit lower than the recent levels?

Yes, all I could say there is we're going to do the best we can with managing our margin in conjunction with all of the other pieces that go into it each and every quarter.

And try to do what we think is in the best long term interests of our shareholders, so we're not going to give any forward-looking view into margin.

All right, great.

Thank you.

Thank you.

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

Congrats on a nice quarter.

Couple of questions.

First, on the SG&A line, we did see that accelerate a bit here.

I look at the year-over-year growth rate accelerate Q1 to Q2, and then into Q3.

I assume a lot of that reflects just the better sales in the quarter, but maybe some additional color upon that would be helpful.

How much of that uptick actually reflected sales, et cetera?

Well, almost all of it.

Almost all of the difference that you're referring to compared to the percentages that you saw in the first and second quarter, since this is the biggest comp number we've had out of those three quarters as well.

It's mostly variable SG&A; a combination of variable selling expenses in the stores, advertising.

We are continuing to spend on initiatives as we have talked about in the past, but we feel like the SG&A number is right in line with our sales increase, and still shows some leverage.

Yes, so going forward then, should we assume a similar type relationship between, say, your sales numbers and then the SG&A growth, as we saw in this quarter?

That's just another area where we're not going to comment much on the relationship going forward.

We're going to, again, as I mentioned with the last question, we're just going to do the best job we can with managing all of the components, and delivering the best results.

Okay, and then does this -- my second question, and I know you've already answered a couple questions or a few questions with respect to gross margins per used vehicle sold, but I just want to ask another.

We've talked a lot about, over the last couple of years or so, the improvements you've made to the reconditioning processes.

Are those -- the gains you've seen there sticking as sales volumes have picked up?

Or are you still seeing -- and then the follow-up to that is, are you still seeing some opportunity to take further costs out of that reconditioning process?

Actually, the answer is yes to both.

We mentioned that we had achieved $200 of what we considered sustainable cost reduction without hampering quality, and in fact, improving it.

And we said that at the end of last fiscal year, we've been able to sustain that through the year despite our sales improvement.

And at the same time, we still see opportunities to get more.

We talked about a few -- a couple, two, three years ago getting as much as $300 a car out of reconditioning.

We still think that's doable.

Perfect.

Thank you.

Thanks, Brian.

Your next question comes from the line of Ryan Brinkman with Goldman Sachs.

Good morning.

It seems that your used retail ASPs increased by about 0.5% sequentially in 3Q, while wholesale pricing, at least as measured by Manheim, which I know is an imperfect proxy, increased by 2.3%.

How do you think about your ability to pass on this higher wholesale price into the retail consumer going forward?

And while higher used ASPs are clearly a sign of strong demand, is there a dollar amount of ASP at which point you think that demand could maybe start to moderate?

Well, first, on the first question, I think those two numbers are -- they're so close that they're not meaningful -- there's not a meaningful difference there, and we wouldn't be able to manage within a percent or two anyway.

And then, remember that more than 40% of what we retail, we buy through the appraisal lane, so it's not -- as you said, it's not a perfect proxy because we don't buy everything at Manheim.

And what was the last part of the question?

Just as retail used ASPs continue to rise, which is a good sign, is there a point at which that could be a negative perhaps?

I mean, we don't see it.

We haven't seen it yet.

We feel like it's a pretty efficient marketplace, and there's always a relationship between new and used that allows the market to clear.

There's a report out there that the average new car is now over $28,000.

So, if you look at our average retail around $18,000, and just look at pure straight averages, there's still a pretty significant spread there between our average car and the average new car.

And I actually think that spread may have widened during this time because I think everybody focuses on the piece you're talking about, which is used, but new car prices have gone up significantly as well.

Great.

Thanks.

Oh, and then just quickly too, are you able to comment on your self-sufficiency rate during the quarter, and maybe talk about trending in that metric?

Yes, that was a little over 40% --

Okay.

-- similar to the second quarter.

We continue to make progress in the appraisal lane with both traffic and buy rate, and it was slightly up compared to the second quarter.

Okay.

Thanks, Tom.

Several years ago, we were as high as 50%.

We're not back there yet.

In the depth of the recession, we dropped down to around a third.

Got you.

Thank you.

Your next question comes from the line of Simeon Gutman with Credit Suisse.

Good morning.

Quick question on the gross profit per used.

I know you've been asked this, Tom, in a few different ways.

Does that 20 --?

I'm sure you'll come up with another one.

Exactly.

The $2,100 of per vehicle gross profit, I guess it's safe to assume that doesn't embed any more aggressiveness on the part of CarMax in trying to stimulate the sale?

Right.

I think it's just more seasonality.

Okay.

If you're comparing to the second quarter, because if you compare to the third quarter last year, it's up.

Right, but no.

But seasonally, it looks like it acted like it should.

Right.

But within that, I was just curious if there was any of that tinkering with the elasticity.

And I know you kind of said there really --

Well, the only thing I'd tell you is that we're always tinkering, and we're always running tests.

And we ran tests in the second quarter; we ran tests in the third quarter.

But if I looked at our overall margins across the chain, I would say there was no impact.

Okay, and then second, how do you, or do you benchmark your actual foot traffic?

And is it just relative to yourself, or are there other metrics you're looking at?

And then connected to that, can you just talk about the competitive frontal bid?

I guess some of the new car dealers have been increasing their efforts, as they always are, but even a couple more than usual in the last couple quarters.

We measure, when we report our foot traffic, it is only benched against ourselves.

So we are actually counting customers in all of our stores, and when we say traffic's up, it is -- that's the only comparison we report, is compared to ourself.

In terms of what competitors are doing, we had pretty strong comps for the quarter.

We're pretty pleased with our overall consumer offer, and its strength, and that when a consumer's out there shopping, they would choose us more often than they would the competition.

Everybody, as you said, has said that they are focusing more on used cars.

When the SAAR goes from 17.5 million down to 12 million, that doesn't really impact us because we don't sell hardly any new cars, but it sure impacts you if the majority of your business is new, and it makes sense that people would shift some focus over to used.

But in terms of impacting our results, it's very difficult to tell.

And the reports that you get are from the public new car dealers, and we're not in every market that they operate in.

It's not a consistent competitive front for us from one market to the other.

So, again, it's not surprising that people would move their efforts towards used cars, but it's difficult for us to see any impact to us.

Okay.

And then lastly, on APRs, not expecting a forecast on where they're headed, but just in general, should the direction be up, stable, or should they start to moderate at some point?

We were hoping you could tell us that.

Obviously, we can't look forward and predict what's going to happen.

But if you look back at our public deals, you can see how much higher they are today, and have been over the last 12 months than they have been historically.

If you take out the recession, and the times when the capital markets were in disruption, we typically realized about a 4.5% to 5.5% spread between APR and our cost of funds.

And since late 2009, that's been running north of 7% consistently.

But as far as going forward, we're going to be at market with our offer to customers, and competitive and in the business.

Okay, and how quickly can you move, or when you said at market, if APRs start moving, it's going to move in uniform in the industry, or is there a reaction time to that?

We can move quickly.

Our reaction time is very short.

We consider our rates for the consumer to be extremely competitive with what's available out there by market.

And the spreads that we're achieving are a result of the offers that consumers can get, not only from us, but from everybody else.

Yes, one of the things we do consistently is look at our three-day pay off ratio, how often customers take us up on that equity, and actually go secure other financing outside of CarMax.

We monitor that very closely.

That's an indication of how competitive our offer is, and we also look at what's going on in the third party.

And we can react quickly if we need to.

Okay, thank you.

Your next question comes from the line of Craig Kennison with Robert W.

Baird.

Good morning.

Thanks for taking my questions.

You've had a lot of success recently.

What would cause you to accelerate the pace of new store growth?

Well, we're pretty comfortable with the stores we've announced so far, five next year, five to 10 the year after.

From a capital perspective, we could probably go a little faster.

We've talked about opportunistically looking for land that maybe we're not quite ready to build the store, but we may go ahead and do some land banking.

In terms of getting stores open, when we stopped a year and a half, or two years ago with our growth, we really cut back, as everybody saw, and we cut a lot of the functions that were in place to allow us to build at 15% a year for six years.

And it takes a while to build that infrastructure back up.

Not the least of which is building back management bench in the stores to deliver a great consumer experience each and every time we open a store.

And then on top of that, we've made a lot of efficiency improvements in our business, and we really have a lot of momentum in that area.

And if we were to aggressively jump back into growth, we would be worried about losing that momentum because that's very powerful for the strength of the Company going forward.

So, I'm not going to comment much past on what we have already announced, other than if we see some land opportunities we'll get out there and do it.

And when we have more to say about growth, we will talk, you'll be the first ones to know.

Great, thank you.

And then with respect to CAF, how have the origination fees that you earn changed in the subprime and prime levels?

And is there an opportunity at all, as credit improves, for you to get a better fee from your partners?

Well, they haven't changed dramatically, quite honestly.

We are still paying our subprime providers, as we always have.

And then, in the tiers above, we have a fixed fee that we consciously make a decision not to change that, even though spreads come and go, just because what we don't want to do is have a demotivation for our third parties to originate with us.

And the fact that if we get greedy when spreads are higher, conversely, we don't want them asking for less when spreads get narrower.

And so what we're trying to do is just optimize the relationship there.

And then in the space where we have the CAF on behalf, so to speak, where Santander and Wells Fargo are, that is basically a dynamic spread enhancement that actually does fluctuate with the current cost of funds and the APR, and then the risk associated with the loans that they're actually buying, using our scorecard.

So, that one's generally about the same amount that they are paying us in their non-prime space.

The fee is far less important to us than the sale.

Right, but my guess is at the subprime level, there's more demand for that particular paper, and you may not have to spend as much to get that paper unloaded.

Is that a fair thought?

It's the same paper with the same repo rate.

I was going to say, our fee structure is already favorable to market.

And it's really because they have the benefit of CarMax's unique origination channel, where we have the high integrity and the quality of the cars that we've been able to actually have a product that makes our subprime provider happy, and helps us sell more cars.

And then last question, with respect to gross profit per car, we obviously have an aging vehicle population.

How has that factor, the fact that we have an older population, affected your mix and therefore your gross profit per car?

Thanks.

It really hasn't yet very much.

I think some of what everybody keeps talking about with sourcing is still a little further out.

Our mix has not moved very much.

It all is going to depend on how quickly SAAR comes back, and when people start trading in because older cars don't necessarily mean lower margin for us.

A lot of it is driven by how many miles are on those cars.

But if people are keeping them longer, then we might get a higher mileage car, which we wouldn't do as well with.

So, it's really difficult to say right now what it's going to look like going forward, because if the SAAR came back very, very quickly, to Keith's point, I think we'd get a lot more trades.

Great.

Thank you.

All right.

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

Hey, guys, how are you?

Hi, Scot.

One of the things -- I guess you mentioned two things regarding the strong comp figures you posted this morning.

Obviously part of it was traffic, but you also mentioned improving conversion rates.

And I think as part of that improved credit availability, can you guys try and quantify that a little bit?

Or at least mention an example of why you would highlight those as drivers to the comp?

Well, we almost -- whenever we mention -- whenever we talk about comps, we always try to at least give a little color around it, and give you an idea of how much is foot traffic, and how much is doing better with the traffic that we get.

It's nice to see in this quarter, that it's a combination of those two things, traffic just a little bit more than conversion.

And then the reason we mention the other part is because there's been a lot of movement in the finance world.

There's been a lot of movement in credit availability, a lot of changes in what we've been able to offer, and the relationships that we've built with our third party lenders, and credit availability.

So, it's not a direct convert to sales, but we've always talked about -- of 100 applications, approximately 75% of those would get an approval of some kind, and at this time, we see that number north of 80%.

It's at about an all-time high for us just in terms of just how many customers apply for a loan, and how many of those got approved.

And we thought that was worth noting.

Got it.

All right.

That's very helpful.

And then the last question, I know the horse is glue at this point, but in terms of gross profit dollars per unit, if we were to enter a market where used vehicle ASPs were to start to decline, would it still be possible to increase your gross profit dollars per unit in that kind of an environment?

Or keep it flat?

Or does that become a headwind if we enter a market where ASPs in the used vehicle market are declining?

It would depend what -- there's so many other variables that it would depend on what's happening with those.

If the reason ASPs were declining is because SAAR was accelerating, then there would be lots of other factors that we'd have to use in order to figure out what our margins ultimately would end up at.

What I would tell you is, if you look back at our history, ASPs went from almost $18,000 to $15,500, and we kept our margins above $2,000 through that whole time.

So, I think we're pretty decent at managing it through movement in ASP, but that's about the most dramatic movement we've ever seen, and we were able to manage our margins pretty flat through it.

All right.

That's helpful.

Thanks a lot, Tom.

Thank you, Scot.

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

King.

Good morning.

I guess first, just a point of clarification on your last comment, so the 16% used unit comp traffic accounted for a little bit more than half of that.

Is that correct?

Did I get that right?

Yes.

Okay.

What was the ESP penetration during the quarter?

How does that compare with a year ago?

And could you maybe just remind us what these refinements are that you've made to the program?

In the reported number on that line, you have got to remember that GAP insurance is in there as well, so that provided some of the increase.

ESP penetrations, as we've said, have always been above 50%.

We are running a little bit higher right now.

And some of the refinements we talked about are largely as how it's presented to the customers, and the amount of options that a consumer has at the point of purchase.

They can vary the deductible; they can vary the length of time that they can buy a warranty.

So we've created a lot more flexibility for the consumer, and it's going pretty well.

We've also had to provide some training for our salesforce to be able to effectively deliver the new programs, so we really started that in the second part of this year, and it's gone pretty well.

We talked about it in the second quarter, and we had another strong quarter in that area as well.

Okay.

Is your salesforce incentivized to sell ESPs?

Yes.

Okay.

And then did you say that your CAF approval rate was over 80% during the quarter?

No, that's all -- of all applications that we get, how many get an approval from one of the lenders that we provide.

Okay, okay.

And that's at an all-time high?

Yes.

Okay.

What was it a year ago, if you have that handy?

It was approximately 75%.

75%.

Remember we used to talk about it and say, of the applications that we get, about half of those get what we would consider a prime approval, about half of what's left would get an approval from one of the other lenders that we provide, and about 25% would get no approval of any kind.

And that's the number -- that total number is the one that's now above 80%.

Got it.

Okay, thanks very much.

All right.

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

Good morning, guys.

This is Dan Galves in for Rod.

Just had a couple questions.

On the SG&A line, in terms of increased personnel to support the store growth, have you already put a lot of that infrastructure into the business?

Or will there be another meaningful uptick in SG&A due to that?

Most of the SG&A difference would be in variable selling expenses related to the 18%, or the 16% comp.

So, in terms of the build for future stores, with only five for next year, and five to 10 the year after, there's not going to be a meaningful number in there, in that line.

There won't be a meaningful number at this point?

Or --?

For the SG&A increase.

Okay, but will there be an uptick for that type of support next year?

Well, but it's going to be in line with the growth plan.

And the growth plan we've announced is five next year, five to 10 the year after.

So, yes, but just in line with that level of growth.

Okay, got it.

Got it, and I just wanted to ask about last year, last year's quarter was just after Cash for Clunkers.

Was there anything in terms of the prior year quarter that would have affected the comp?

Would you say it was an easy comp this quarter, or a more difficult one?

Maybe.

We talked about Cash for Clunkers last year being a spike in the second quarter.

But we also said that by the end of the year, we didn't think it had hardly any impact at all.

So there may be a little of that in there, but if you -- another way to look at our comps for this quarter is look at it over a three year period going back to pre-recession --

Yes.

-- and we're still negative 5% compared to that number.

Yes.

And if you go first quarter, second quarter, third quarter this year, we would have been, on a three year number, negative 9%, negative 7%, negative 5%.

So when you look at it like that, it looks a lot smoother, and it looks like it's more of a steady improvement.

Okay, that's very helpful.

I appreciate it.

And one other one, in terms of the seasonal decline in gross profit in the third quarter, what normally causes that?

Is that weakness in wholesale prices in the winter months?

Yes, I think that's part of it.

We always see the depreciation curve is pretty consistently down the most during that time period, and that's just usually the way our margins have flowed.

It had gotten to the point where it was so consistent for us we really didn't talk about it very much, and didn't get asked about it very much.

Yes.

We're getting asked about it a lot today, obviously, and I think it's because the last couple of years we haven't seen it.

Right, but did that seasonal decline in wholesale prices, in terms of higher depreciation, did that happen this year?

Yes, but still not to the extent it has in the past.

Okay, got it.

Thanks a lot for your answers.

I appreciate it.

Yes.

Your next question comes from the line of Mark Mandel with ThinkEquity.

Good morning, everyone.

I just wanted to drill down a little bit deeper into the strength in your new car sales.

And I recognize it's just a small percent of your overall business, but what do you attribute those strong results to?

Is there an increase in advertising, incentives, in traffic conversion?

What are your thoughts on that business?

We have to look at the results before we can tell you.

Now that's one where I think you can make a strong argument that the Cash for Clunkers, after August of last year, we had no inventory.

So it's a really easy comp for the quarter for new cars, for us.

That's not a broad statement on everybody else, but we only have a few new car stores.

Right.

We have a big Toyota store up in Laurel where we did the majority of our Cash for Clunker deals, we did the majority of those in the second quarter.

And I'm not looking back at last year, but I'm guessing that that's the main reason.

But no changes in the way you view this business on a going-forward basis, in terms of how much it might contribute, or how much you might put into it?

No.

Okay.

That's all I had.

Happy holidays.

You too.

Your next question comes from the line of Scott Stember with Sidoti & Company.

Good morning.

Can you talk about the new stores that are going online, and whether they will be used in the flow concept of reconditioning?

And whether any benefit from that is in your stated goals of $300 per unit improvement?

All new stores going forward will be on the flow format, which is an evolving format as it is.

So we expect to be able to continue to improve there.

But more than 80% of the cars that we retail are still produced in our traditional stores, where we have also achieved the level of savings that we've announced.

So, we think we can make improvements in both formats.

We think the new format -- the new flow format going forward is the right way to go for lots of different reasons.

But it doesn't mean that we don't think we can get improvements in our traditional stores, and in fact, we have.

Actually that's all I have, thank you.

All right.

Thank you.

Your next question comes from the line of John Neff with Akre.

Hi, thanks for the question.

It's kind of a multi-faceted question, but just wondering if you could possibly quantify, or give any color around what kind of impact record used car prices have had on things like the recoveries you're experiencing, and therefore CAF performance and spreads there, as well as the credit approval process in terms of people feeling more comfortable perhaps with the underlying collateral on the loan?

Thank you.

Yes, I don't think that average retail has -- the strong wholesale prices absolutely have an impact on our recovery rate, but I'm not sure how meaningful it is.

Keith or Tom?

It is clearly, we're still experiencing record recovery rates at CAF, and that's basically because the wholesale market remains strong.

So that does help our loss there.

It does help our loss.

And it does help the CAF income when the average selling price is higher because it's a higher dollar volume on the loans.

Right.

So we're financing a higher average dollar amount.

In terms of approvals, I think it's more related to the customer than it is the car.

Exactly.

Thank you.

Okay.

(Operator Instructions)

Okay, with no further questions, I want to thank all of you for joining us today.

As always, I'd like to express my thanks to all of our CarMax associates for their commitment.

Thank you for all you do every day, and happy holidays, everyone.

Thanks.

This concludes today's conference call.

You may now disconnect.