車美仕 (KMX) 2011 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Q4 fiscal year 2011 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.

Katharine Kenny, you may begin the conference.

Thank you.

Good morning.

I'm not going to talk about the weather today.

I guess I will just introduce everyone who is on the call today.

I am Katharine Kenny, obviously, Vice President of Investor Relations, and I want to thank you for joining the call.

We have Tom Folliard, our President and Chief Executive Officer on the call; 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.

Let me also take a moment to remind all of you that we do have an analyst day coming up here in Richmond on April 14, and we would love to have you join us.

Now I will turn the call over to Tom Folliard.

Thank you, Katharine.

Good morning, everyone.

I do have to say we almost had to cancel the call today with all of the excitement in Richmond over the BCU Rams in the final four, so, go Rams.

I'm going to talk about the year and the first quarter.

I'll first give you some highlights from our fiscal year, and then I will talk about the fourth quarter a little bit and turn it over to Tom for some finance highlights.

We're pleased to report another record year for CarMax.

We reported net earnings of $381 million, an increase of 35% over the record results achieved in the previous fiscal year.

Our used unit comps increased by 10% for the year compared to a 1% increase in fiscal 2010.

This was largely due to the increase in traffic, but also to an improvement in sales conversion.

We estimate that we increased our share of the late model used vehicle market by approximately 7%.

We achieved an important milestone by recording over $1 billion in annual wholesale vehicle sales.

And even though we restarted our growth plan this year, we still reported some modest SG&A leverage.

On to the fourth quarter, highlights included used unit comps increased by 12% despite facing the toughest comparison of the year.

This was due to our continued growth in traffic.

Total gross profit for CarMax increased by 21%, and we achieved gross profit per used unit of over $2,000 for the ninth consecutive quarter.

And our wholesale unit sales grew by 41%, largely due to a significant increase in our appraisal traffic, while at the same time our appraisal buy rate remains higher than historical averages at nearly 30%.

All in all a very good quarter and an excellent year.

I will turn it over to Tom to talk about the finance side of our business.

Thanks, Tom, and good morning.

CAF income for the quarter remained strong.

For the year, it was higher than we originally anticipated due to the factors mentioned in this morning's press release.

First the continuing environment, where the margin between APR charged to the customer and our funding cost remained high relative to historical norms.

Additionally, we had better than anticipated loss experience, which drove a reduction in our allowance for loan losses and our loss provision.

Our in-house lending network continued to support sales this year.

Credit availability during the quarter and all year was greater than in fiscal 2010.

More than 80% of customers applying for credit received an offer from CAF and/or one of our lending partners.

The share of sales financed to our subprime lenders in the fourth quarter remained consistent to a year ago at 9%, reflecting the normal spike in subprime lending during tax refund season.

For the full-year, subprime accounted for approximately 8% of our sales versus 6% in fiscal 2010.

As you know, we do not normally give guidance and don't plan on giving guidance in the future.

However, given that this will be just the second year under the new accounting rules for CarMax Auto Finance, we chose to provide a range of guidance for CAF income in fiscal 2012.

Underlying our estimate of $205 million to $235 million, is an assumption that during the quarter -- or during the course of the year, the margin between APR charged to the customer and our funding costs will compress for new originations, but not all the way back to historical levels.

Also, we anticipate that our provision for loan losses will be approximately 1% of managed receivables.

Next month when we release our fiscal 2011 Form 10-K, we plan to begin providing some additional metrics relating to CAF's loan originations, which we hope you will find useful.

Tom?

Thanks, Tom.

I will mention just a few other points before we go on to questions.

As you know, we're continuously looking for ways to enhance the customer experience and respond to customer needs.

In December, we launched our new mobile version of our website, and it is off to a great start.

Currently, it accounts for approximately 10% of our website visits and an even higher percentage of our leads.

We will continue to monitor customer feedback, and our Web team is already prioritizing the development of a variety of enhancements to our mobile website.

We also recently launched a test of what we will be calling CarMax EasyShop in two of our stores.

This initiative offers customers more capabilities online before going into the store.

Those include, they can now set up an appointment with a sales consultant.

They could put a car on hold from home.

They could begin to complete their paperwork.

They can apply for a credit and receive financing decisions.

They can also initiate a transfer of any vehicle, whether it is free or paid and have it transferred to either Raleigh or Fayetteville.

If it is a paid transfer, we can take their credit card information over the Internet and start the transfer process before they even get to the store.

We will continue to strive to allow our customers to shop in whatever way that they choose.

One other thing to note, we have seen a change in our mix of vehicles sold over the course of the year, during which time the percentage of customers that purchased an SUV or truck fell from a little over 35% to around 30% at year-end.

And over that same period of time, we've seen compact and midsize car sales grow in a similar percentage in the other direction.

And while there are several reasons why this could occur, the increase in gas prices is the most obvious one.

But one of the great things about our business model is we can quickly adjust our inventory to offer consumers exactly what they're looking for at any point in time.

And as we have mentioned before, our margin performance is not dependent on our mix of vehicles sold.

Let me also note that in today's press release, we included a list of all five stores that we plan to open in fiscal 2012, four of which will be in new markets for CarMax.

And we also now believe that we will be in a position to open between eight and 10 stores in fiscal 2013.

And with that, we will open it up for questions.

(Operator Instructions).

Simeon Gutman, Credit Suisse.

Hey, Tom, first, I take it from that opening remark that you have VCU in your final four bracket?

I actually had -- I had VCU and Butler both.

And what about the Richmond Spiders?

I had them making it to the Sweet 16 and then losing to Kansas.

Oh, okay.

Onto used car stuff, first, on the top-line trends, there was some speculation that the sales strength moderated during the quarter.

And whether or not -- if that is true, curious what the dynamic is, if you think that pricing for nearly new vehicles is at a point now where customers are gravitating more towards new or was it some other variables?

You know, we were pretty happy with the quarter at 12% comps, on top of 12% the year before.

And more importantly, we're real happy with the year.

I mean we had 10% of comps in a really tough environment.

We felt really good about our performance.

We grew our market share by around 7% for the year on top of a double-digit gain last year.

So we don't focus as much on a couple of points in a quarter.

We were really, really pleased with our performance for both the year and the quarter.

And, again, it was our toughest comparison of the year.

And the access to desirable inventory -- I mean that is still the same?

And then the conversion within your store meaning the traffic levels, I mean any changes there?

Well, I mentioned, if you -- on the -- when I talked about it at the beginning, most of the fourth quarter was driven by traffic if not all of it.

But during the year, we saw an improvement in conversion over the full year.

So you know there's a lot of different factors in there.

There's all kinds of movement in credit.

The fourth quarter tends to have a little more volatility because of tax return season and our movement in subprime.

And it just makes the comparison over a couple of points a little more difficult to really gauge, so we tend to look at it over a longer time period.

But in general, it's not like we're at some tipping point here where customers might be going more towards new because either the incentive spread is making it such or that used car pricing has hit a certain point where it just makes sense?

I mean we haven't seen -- when you look at the specific car data, we really haven't seen the spread tighten as much as you might think.

Even though used car prices have been rising in kind of an unnatural depreciation or appreciation curve over the last couple of years, the spread is still what it used to be.

The average new car is up around $28,000.

So when you look at it on average, our average retail and the average new car price, the spread is as big as it has ever been.

Okay.

And then second, in the past couple of weeks, we have heard from a couple of the new car dealers that they're adjusting their pricing strategies, anticipating some supply shortages.

And I think some of them said that they are trying to sell closer to MSRP, that margins are already moving up now in anticipation of that.

So granted if that happens to the entire supply chain, your acquisition costs may keep going up, but should that translate into higher margins or spreads on the used as well?

Well, we can't comment on the last couple weeks, so we will only talk through the end of the quarter.

And in terms of some of the behaviors you talked about, those would only help us.

If people are keeping their prices up closer to MSRP, that -- back to the spread we talked about earlier, that would only kind of support the spread.

And if you look at our performance over the last couple of years in very high appreciation and depreciation environments which are largely driven by supply, we've been able to maintain our margins during that time.

So I don't know that -- it does make it a little bit easier if the market is appreciating.

We've talked about it before, a little bit of a tailwind on margins, but it's not like we would look at this as an opportunity to really spike up our margins.

We're just trying to maximize and optimize the sales and profitability of the business.

Okay.

And let me just sneak one last -- just kind of specific on Toyota.

I know -- I heard your comments that nothing really in the mix moves the margin.

But it seems like there was some margin pressure in Toyota and import last year, at least on the new side.

And maybe that is starting to reverse around now.

Are you seeing any changes because supply at least has been alleviated on that side a little bit where margins are starting to move up on some of the imports?

Yes, I mean we don't talk that specifically about our margins.

We've never talked about manufacturers in particular.

But remember our cars are generally three years old, and so some of the pressures you hear from specific new car sales, they don't go all the way down to where we sell.

We haven't really seen anything in particular.

Okay, thanks.

Sharon Zackfia, William Blair.

Good morning.

I'm curious as the appraisal traffic has been so healthy and your buy rates so much better, could you give us an update on kind of where your sourcing is now as a percent of the retail cars that you sell coming from appraisal?

Yes, that stayed a little over 40% in the quarter, and we ended around there for the year.

So a lot of our appraisal traffic -- it's been a little unusual.

A lot of our appraisal traffic pickup has been on wholesale vehicles.

So one of the reasons you see our wholesale unit sales so far outpacing our retail sales is that piece of appraisal traffic has come back a whole lot faster than the other side.

And I don't have a great explanation for you, but it's very noticeable.

Okay.

A separate question, just an update on where CAF's market share is now as a percent of the cars that you sell or the percent that is financed in house?

CAF is still running about 35% -- a little bit over 35% of sales.

Of all the cars that you sell or the ones that are financed internally?

That is of all the cars that we sell.

Thank you.

Hey, Sharon.

Yes?

Are you going to Shanghai?

I am going to Shanghai.

Do you want to come, Tom?

Not really, no, but have fun.

All right, take care.

John Murphy, Bank of America.

Just a quick question, Tom, you've had a really good trend in showroom traffic for the past couple quarters.

I was just wondering how much of that you think is really just from the general recovery in the economy in demand and how much of that is being driven by your increased spend on advertising?

Well, I have a couple marketing people in the room, and they're looking at me like it is obviously all our spend.

I would guess it's probably a combination of both.

When we talked about variable SG&A coming back over the last year or two, one of those pieces is obviously advertising, and we talked about moving that along with sales.

When we cut our advertising back a couple years ago by 30%, 35%, which was in line with our sales drop, we thought we could do that in the short term, but we're big believers that getting our name out there and building brand awareness is very important to the long-term health of the company.

So we're pleased to be able to get back up in some of our spending and really drive our brand name out there, particularly in some of our lower awareness markets.

But even in the high awareness markets where we've been around for 10 to 15 years, you can't keep running at a significantly lower level of advertising; at least we don't believe that.

So in terms of our traffic, I would have to say it is probably a combination of both, and maybe even more so a little bit of the economy coming back some.

Okay.

And the second question on financing, I was just wondering if you could remind us the terms of the Santander agreement, you know the length of the term on that agreement to you, the subprime financing?

And also, just wondering if there would be an opportunity for CAF potentially pushed down the credit spectrum as the ABS market seems to be pretty strong and demanding of auto ABS, and there might be an opportunity for you guys to push further down in the credit spectrum in CAF.

I can comment on that.

First with regard to Santander, it is pretty much a short-term relationship.

And the way it works is we allocate them a round of distribution of the loans that we originate or we used to originate, and they pay us a negotiated fee, so that is pretty straightforward.

As far as CAF taking on more of that business, it is really a balancing act between the economics of that business, our ability to finance and relationships with the partners.

And while the market has been a lot stronger as of late, it is hard to predict what it is going to be like in six to eight months, which is actually when you have to arrange the financing for the loans you are originating today.

So it is obviously something we're continuously assessing.

We're assessing our approach.

And it's business that we like, so as it makes sense to do it, you can expect us to.

But we can't really give you any guidance as to when that is going to happen or how much.

But there's nothing technically to preclude you from moving down the credit spectrum in your securitizations?

No.

It's just a matter of getting the deals done and the cost.

Great.

And one just last question, there was some scuttlebutt around the Dodd and Frank rule making, that there might be some higher risk retention needed in securitizations.

Have you heard anything about that or have you done any work on that as potentially retaining more risk in the ABS pools?

It's something that we have been keeping track of and monitoring, but we really believe it is still too early to tell what it is going to turn out as and how much risk retention it's going to require.

But obviously, we're keeping a close eye on it.

But one thing to note, John, is even if it's -- we talked about what you hear is 5% retention.

And at that level, regardless of how it is sliced up, it is not a deal-breaker for us; it is something we can handle easily.

Thank you very much, guys.

Rod Lache, Deutsche Bank.

Good morning.

This is Dan Galves in for Rod.

I just wanted to follow up a little bit on the question about used supply.

If new vehicle inventories, especially Japanese vehicles go down, we're hearing reports that new car dealers are already kind of scrambling to try to get as much used inventory as possible.

How does that impact your ability to acquire enough used vehicles?

And I guess on -- what is the relationship between potential increases in acquisition price versus what you can get in the market?

How do you think about that going forward?

You know, if there's a -- if that's really true and there's a shortage in supply and demand stays the same, then, obviously, we're going to have to pay more for those cars and so will consumers.

But we have been through that in a much, much bigger scale, in my opinion, than what this could possibly create when the SAAR went from 16.5 million down to 10.

And we saw -- in a three-month span, we saw our average retail went up by $2,000 in three months.

And we were able to improve our inventory turns and maintain our margins.

So I feel like we have been through it, and we know how to manage through it.

And if there is a shortage, I feel like we are really good at finding the inventory necessary to meet the consumer demand.

One other thing to note is we have a very small market share of one- to six-year-old cars nationally -- less than 2%.

So even if there is a big rush out there, we are still not buying a number of cars that I think is at the level that would cause concern.

On average, our market share of one- to six-year-old cars across our markets is only 5% or 6%.

In our more mature markets, it is closer to 10%.

But, again, nationally, it is only around 2%.

Okay; I appreciate that.

On CAF, one thing -- the loan loss provision, I think, was 0.7% in fiscal 2011.

You are saying it could be 1.0% in fiscal 2012.

What is the reason for that going up?

And also, you mentioned that on the collateral spreads, you expect some compression in the new originations.

On the total pool, do you think -- would you say that the collateral spread on the total pool would be up or down versus fiscal 2011?

With regard to the loan loss, I think you can -- the lion's share of it is the result of us having to adjust the loan loss provision downward last year.

So if you look at FY '11 versus what we're expecting in FY '12, it's not really an increase in expected losses from where we stand today.

It's really the fact that we had to adjust downward in the first quarter of FY '11.

With regard to your second question, could you repeat the --

I guess I'm just saying the collateral spend on the total pool, you have newer pools that have much higher spreads than the older pools.

As the older pools fall off, combined with potential compression in the newer pools, what do you expect for kind of the average collateral spread that you will be booking in interest income in fiscal 2012?

We can't give you what we expect the spread to be because we really can't tell.

There's a lot of factors that go into it.

But I would -- as you kind of pointed out, it's a portfolio where things roll off and come onto the portfolio.

And the majority of the paper in that portfolio is out there in public transactions where you can kind of -- we have a lot of information between SEC filings and between our monthly reporting that can give you information about that.

And I think going forward, we're going to give you some metrics about new originations so you will have information about that.

What you don't have and what you don't know and we don't know is how much is going to roll off of each of those portfolios, so we can't tell you that.

We don't know what our future funding costs are going to be on the portion of loans that are not yet in a public deal, so you're going to have to make assumptions on that.

And we don't really know losses but we have given you some guidance on that for FY '12.

So I can't give you guidance on what the overall portfolio is going to do, but I think you can look at what is out there and you are going to have to make some assumptions on what is going to roll off and what it is that we're putting in.

And obviously it's baked into our guidance that we gave for the year.

It's in the range there, and you will have to -- some of that detail is -- we're guessing at some of it as well.

Okay, I appreciate it.

And just one other one.

Can you give us an update on your expected CapEx per new store going forward?

Per new -- well it's a little complicated.

Our CapEx guidance for the year was $225 million.

And our average CapEx per store is in the $15 million to $25 million range, depending on the size of the store.

What is really difficult is to figure out the timing of when the capital is actually spent, so we've talked before, it's about a three-year lead time from the time we decide to go to a market to the time we actually open the store.

And from the time we actually commit to a piece of property to when we pay for it and when we start construction, you know it is kind of all stretched out.

So when you look at the $225 million we said for this year, that's not really just to build the five stores this year; it is also investments in the next couple of years as well.

Okay, thanks for that, Tom.

Okay, thanks, guys.

Scot Ciccarelli, RBC Capital.

Hi, good morning.

This is Austin Pauls on for Scot.

My question is on the reconditioning costs.

I think you said that you estimate that at $250 per vehicle.

If I'm not mistaken, I think you had said $200 in the past.

Are you seeing additional efficiencies there?

Well, when we first started this, and I don't remember the exact time, but I think it was in the fall of calendar '08, we said we thought we had about $300 of waste that we could go after in our reconditioning process.

And over the last couple of years as we have achieved those savings we have, and then we felt like they were sustainable going forward, we've gone ahead and announced them.

At the end of last year, we said we had achieved $200 worth of savings.

At that time, we were actually above that, but we wanted to make sure that the dollar amount was sustainable.

So as this year has gone on, we now feel really good about the $250, and that is a cumulative savings going back to the fall of '08 that we have now achieved that and it is sustainable and it will be reflected going forward.

You can almost see it in our change of margin performance over the last couple of years.

And in terms of getting the full $300 that we mentioned, we really feel like the last $50 will be harder than the first $250.

So that could take even longer because now you're really starting to get into very like kind of minutia and very detailed refinements of the process to save a couple bucks here and a couple bucks there.

Okay, got it.

Thanks very much.

Ryan Brinkman, Goldman Sachs.

Hi, good morning.

Could you speak to the potential impact on same-store retail unit sales in 4Q related to changes in tax refund anticipation loans year over year?

Well, that's a factor in every year's fourth quarter.

I think the only thing that really makes much of a difference is the timing of the tax refunds, and they were a little bit different this year.

But by the end of the quarter, I would say it's about what we expected.

Okay.

And then also, could you talk about the fact that wholesale ASPs increased quarter over quarter to a record, which is a good thing, but retail declined sequentially.

And is this reflective of higher prices at wholesale and potential inability to pass on wholesale price inflation at the retail level or is this a quirk?

That?

Yes, I didn't even actually notice that.

You're talking about ASPs and not margins, so if you're talking about passing on price, I would look at it more on margin than anything else.

And our fourth-quarter margins were fine.

Right.

They did --

And then wholesale, as I said, it's outpacing our growth in sales but our margins are also very strong.

Okay, great.

Then just last one, I appreciated your three comical Super Bowl ads in the quarter.

Does this portend a shift toward more national advertising?

And what is your thinking right now as to advertising expense as we head into 2011?

It does not change anything about our view of national advertising.

The Super Bowl is a very unique event for us.

And to do two ads on the Super Bowl nationally cost a couple million extra dollars.

To do national advertising over the course of the year is significantly more expensive.

So we did it for a specific reason, to get our name out there, to get some brand awareness.

In terms of a steady diet, we're still not at the size when it makes sense.

It is really just a math game for us.

When we get to a point where national advertising provides leverage then we will do that, but at this point, it doesn't.

This year, for the first time though, we will have a little bit of national advertising in radio and some parts of cable.

But the savings from that will be immaterial.

Okay, great.

Thanks so much.

Patrick Duff, Gilder.

Hey, guys.

How are you?

Can you guys give an update on the number of sales associates and associates at year-end and whether or not you feel the stores are appropriately staffed for the level of business you have at the current moment?

I don't have the exact numbers on sales consultant and total staffing.

I can tell you, though, that you may have seen some press releases we had during the fall about hiring up.

A lot of that was in the sales consultant side, as well as technicians and detailers.

We made a ton of progress through the fourth quarter.

And we feel pretty good about where we are right now.

Sales consultant staffing is always a challenge for us.

It is a full commission job.

It is nights, it's weekends.

It's a little bit higher turnover than some of our other positions.

So for the most part, we're where we want to be.

We have a few stores that are understaffed and -- but this is always a busy hiring time for us, heading into the spring.

Any chance Shaka Smart might be looking for some part-time work?

I don't think so.

I think he might have some full time offers on the table after that.

All right; thanks a lot.

Craig Kennison, Robert Baird.

Good morning.

Thanks for taking my questions as well.

First question, to what extent did your consumer sourced ratio drive your gross profit per car?

Did that mix change much?

It did not change much, so it didn't really have any impact in terms of like third to fourth quarter.

Thanks.

And in terms of your subprime mix, any changes materially there?

No.

(multiple speakers)

Our subprime, same year over year and -- up year over year but similar quarter over quarter.

What was that number, 8%?

9% in the quarter.

Thank you.

And then, with respect to the new stores you plan to add, is there any change or tweak to your format or are you comfortable with the footprint you've got?

Well, we're constantly tweaking and adjusting.

I think we've done a really good job over the last 10 years of being able to do more out of a smaller box.

So I think we have refined our satellite store to be I think pretty efficient.

And -- but in terms of from when we were just most recently opening stores, no, not very much at all.

Great.

Thank you.

Matt Nemer, Wells Fargo Securities.

Good morning, everyone.

Sorry for the background noise.

So quick question on inventory, we noticed during the quarter that the inventory levels instead of -- they typically would go up into the spring, and it seemed like they were actually coming down in February and into March.

And I was just wondering if there's anything going on there specifically in terms of less inventory per store or more inventory productivity?

No, our inventory within the quarter, I think, Matt, was up, a little over 20%.

And our store sales were up 14%.

And if you adjust for average retail, you can probably knock about 4 points out of that.

So I don't know what number you are referring to.

Well we were just looking at total cars for sale on the site from kind of January or December into February and March; it looked like it was sort of ticking down sequentially.

Maybe we're not doing that the right way, but it seems like it would typically go up into the spring --

Oh, no (multiple speakers); when we report our inventory, we report all inventory, everything that we own; so that includes all of our WIP inventory as well -- you know, the work in process stuff that is not salable.

So I haven't actually looked at it the way you just said.

But I can just tell you from an inventory standpoint, we are about where we want to be.

And we felt better about our inventory in the fourth quarter this year than we did the fourth quarter last year, when we actually talked about how we were under inventoried.

Got it.

Okay, and then secondly, on the CAF guidance for the year, does the high end of that range, does the entire range assume a 1% loss rate or is there some variation in that?

And can you talk to what you are expecting in terms of spread degradation within that range?

The range incorporates potential changes in losses, in spreads and everything going on in the business, so you can take that for what it is.

As far as the spread compression, we've talked about -- I don't like calling it spread, but this margin between the APR we charge the customer and our funding costs as being abnormally high or higher than historical levels for some time.

As we've said last quarter, it has been in the ballpark of 7% or a little higher.

The last several ABS transactions seen in the public market, it was in that ballpark, just under 7% in the deal we closed a couple weeks ago.

And history has been that it is in the 4.5% to 5.5% range.

So one thing I want to plan here is we don't know what the new normal is, because we are in -- frankly in a new world after the capital markets were in disarray.

But we are assuming that we're going to move south on that spread a bit less than halfway to where it used to be.

And over the course of the year, and remember that is on new originations only because everything else is locked down in the public market.

Okay.

And then lastly, I realize it has only been a week or two, but on the EasyShop program that you're testing right now, how -- what kind of time do you think you can save per transaction with some of those changes?

How much time can you take off of a typical transaction?

Well, it is too early to read any results.

But depending on the customer's needs, a significant amount of time could be taken out.

A customer could now select a car, let's say that car needed to be transferred.

They could initiate the transfer from home without speaking to anybody.

They could pay for that transfer with a credit card payment.

They could apply for financing, get approved, fill out pretty much all of their paperwork and then set an appointment to see a sales consultant at the store.

And if there is not a trade involved, when they show up at the store, I mean they're pretty much done if the car is there and ready.

And in terms of once they get to the store, having them in and out the door, I'm sure we could do that in less than an hour.

I don't know how much time they would've spent at home on the Internet, but, again, our main goal is to let the customer do whatever it is and shop however it is that they want to shop.

If they want to do more from home, we want to provide them that capability.

So I mean we're real excited about the components that we're allowing consumers to do from home, but the results are yet to be seen.

But in terms of time savings, it could be enormous.

Great.

Thanks very much.

Clint Fendley, Davenport.

Thank you.

Good morning, guys.

On your market share increase by 7% for this last year, if I'm not mistaken, I think that is a slightly slower rate than the 10% we saw last year.

Any reason for the difference?

You know, at that level, a couple of points, we don't really try to read into it too much.

We've talked about market share data being a bit squishy.

We went away from giving quarterly data because we were not comfortable with its accuracy.

There is no great measure out there for market share.

We do have a consistent measure that we try to give every year.

We have to buy DMV data, but that data can be very inaccurate, even when we compare it to our own actuals.

Over the course of the year, we feel pretty good about it.

Directionally, we're pretty sure it is right.

The way I would think of it is we have grown our market share 10% and then 7%, one year on top of the other.

Last year was actually a bit above 10%.

So we have close to 20% market share gain in two years; we're pretty happy with that.

Okay, great.

And then on the substantial increase that you saw in your appraisal traffic, I'm wondering, did you see relatively higher levels of traffic at your stand-alone car buying centers?

You know, the car buying centers are a very, very tiny piece of the puzzle for us.

We only have five compared to 104 stores.

And in terms of the volume of appraisals, they're not close to what one of our big stores does.

And I actually don't even know the increase.

My guess is, it is about in line with the increase in the other stores, but the numbers would be a lot smaller.

Okay great.

Thank you, guys.

Go VCU.

Brian Nagel, Oppenheimer.

Good morning.

This is [Rupus Brigg] for Brian Nagel.

Did you see any impact from the adverse weather during the quarter?

You know, that is always a factor in the fourth quarter, and we did have some times when a bunch of our stores had to close for a number of days.

We have always felt that in our business, different than, let's say, groceries, we get that business back.

So our guess is, by the end of the quarter, we got what we were going to get anyway.

Okay.

And in terms of the wholesale side of the business, [we sold at] 41% growth this quarter.

Were there any new drivers for that growth outside of the higher appraisal rate in traffic or buy rate?

(multiple speakers) no because that is where all of that volume comes from.

100% of those cars sold are bought through the appraisal lane.

So that is where all the volume came from, is increase in appraisal traffic and a very strong buy rate, and that delivered the volume that you saw.

Okay.

And my final question is, where are your current APR rates trending?

You mean the actual APR to the consumer?

Yes.

(multiple speakers).

I'd encourage you to take a look at the last transaction.

I can get [that one for you].

Hold on a second.

In the public deal we just closed, the weighted average APR was just under 9%, between 8.5% and 9%.

Okay.

Thank you.

Himanshu Patel, JPMorgan.

Hi, this is Vivek Aalok for Himanshu Patel.

I had one question on the potential mix shift due to higher gas prices.

You know, given higher -- given the gas price movement recently, have you noticed any conspicuous diversions between reduced vehicle prices of smaller cars versus larger vehicles?

I'm sorry, I didn't understand the question.

Yes, so the question was, given the recent movement in gas prices, did you notice any divergent movement between your used vehicle prices of smaller cars versus larger cars?

Oh, you know, when I talked about the movement in inventory in our mix of sales, that was more gradual over the course of the year.

It didn't move that much in the fourth quarter.

So I think there is a thought out there that there is this recent spike that has really changed behavior.

And from the way it has flowed through for us, we really haven't seen it that way.

But it is noticeable from the beginning of the year to now in the percentages I gave earlier, where trucks and SUVs have gone from about 35% of our sales down to around 30%; and midsize and compacts have gone from about 30% up to 35%.

So we have seen that movement more gradual over the year.

My personal opinion is people are starting to feel like, okay, I don't have to worry about gas prices going under $3 anymore and it is kind of here to stay, and we're starting to see that behavior.

But in the fourth quarter, it was pretty minor.

Okay.

And the second question was on collateral spread.

Can you comment on your collateral spreads on recently issued loans versus the spread on the loans issued let's say six months earlier?

And then what is your sense on the collateral spread going forward?

And what is a normalized spread if you can speak on that as well?

Were you referring to the spread between what we charge the customer and our funding costs in the auto finance business?

Yes.

I think we just talked about that, but, in recent quarters, we've experienced a spread between those two in the neighborhood of 7%, perhaps a little bit higher.

In the transaction we just closed, two weeks ago in March, that spread was just under 7%.

If you look back to 2005, 2006 timeframe, that number ran between 4.5% and 5%.

So does that give you a --?

Okay, yes.

Great.

Thank you.

Bill Armstrong, CL King & Associates.

Good morning.

The Super Bowl ads, could you just tell us how much you paid for them and how effective they were?

I'm not sure how you would measure their effectiveness, but any way that you could measure their effectiveness in driving traffic into your stores.

Yes, we're not going to talk specifically about how much we paid for them.

It was widely publicized how much an ad costs, and we have good relationships with our media outlets, and I felt good about what we paid.

In terms of the impact, we never did the Super Bowl ads to try to drive short-term traffic.

I mentioned earlier, it is more of a brand awareness play for us.

And we thought it was a good opportunity to get our name out there, and we thought it was a good opportunity to try a national spot once where on our -- as I said, as a steady diet, that would be too expensive for us.

So it was more to build our brand.

We have a new ad agency.

We're pleased with the material that we have had.

I think our marketing team has done a good job of assessing what resonates with the consumer.

So, I mean we're really pleased with the ads.

We were happy with what we wanted to accomplish in the Super Bowl.

But in terms of short-term traffic, that was not the reason we did it.

So was that something you're thinking of repeating, then, on an annual basis?

That's a decision -- even this year we did not make it until the latter half of the year.

We would probably take that same approach this year.

Okay.

And then one other quick question, I think you said your appraisal traffic buy rate was about 30% in the fourth quarter.

What was it in the year earlier quarter?

Hold on; we'll have to get that for you.

I think it was pretty close.

It might have been up slightly.

Up slightly?

Well I'm going to get it for you.

Hold on.

Yes, it was up slightly versus the fourth quarter last year.

Got it.

Okay, thank you.

Mark Mandel, ThinkEquity.

Thanks, good morning, everyone.

Just a follow-up on the reconditioning costs, can you give us some idea on what the reconditioning costs, at least pro forma, are on your new stores, versus your existing?

I know the new stores have that flow-through model, I believe.

Yes; the savings we achieved, we achieved across the board.

Still today, north of 70% of everything we recondition is reconditioned in an old-format store.

So we never would've achieved the savings had we not done it across the board.

And then the new stores that we built, some of those are satellite stores of existing stores.

Some of those are satellite stores of existing stores that are in the traditional format.

So Escondido, for example this year, will be a satellite of Irvine, which is a store that works in the old format.

So the savings we achieved are across the board and sustainable, and we feel great about that.

The new format stores, in terms of their ability going forward to achieve better efficiencies we think that it is a better format for us.

But the savings we achieved were in all of our stores.

Okay.

And given the long lead times, is there anything in the real estate pipeline that you can share with us in terms of store openings, say, perhaps beyond this year?

Well, this year we said five.

Next year we have said eight to 10.

I'm sorry I meant beyond next year.

Yes, that is as much as we're going to give right now.

You can see our CapEx number.

We have talked about going out and looking for land opportunities which we are continuing to do.

We have always been a company -- we have always been a company that is defined by growth.

We're still only in 45% of US markets.

We still feel great about our growth options going forward.

Just, we've given two years of guidance on growth going forward, and there's a lot of uncertainty still in the marketplace, and that is all we are prepared to give at this time.

Okay.

And then my final question, regarding the bump in the wholesale sales, which, as you pointed out, was driven by the increase in appraisal traffic, what can you speak to in terms of what is behind that increase in the appraisal traffic?

We have gone down a little disproportionately for a couple of years, actually, prior to the recession.

But I've also always said that we felt like the SAAR, where there is more activity in the marketplace, more customers out there buying and selling cars, whether it's new or used, that we would benefit, both on the appraisal side and the sales side.

And the SAAR is up in high teens for the year, so I think a lot of it is driven by that.

Just more activity in general in the marketplace.

Okay.

So you see that as sustainable then?

Yes, unless the SAAR drops by 20%.

Right.

Okay, thanks a lot.

Good luck.

All right.

Thank you.

There are no further questions at this time.

All right.

Thank you once again.

I want to thank all of our associates for all they do every day, and we will see you next quarter.

Thanks, and go VCU.

This does conclude today's conference call.

You may now disconnect.