車美仕 (KMX) 2012 Q1 法說會逐字稿

Good morning, my name is Shira and I will be your conference operator today.

At this time I would like to welcome everyone to the CarMax first-quarter 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.

Miss Katharine Kenny, you may begin your conference.

Good morning and welcome to our fiscal 2012 first-quarter earnings conference call.

On the call with me today as usual 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 prospects, plans 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, 2011 filed with the SEC.

Tom?

Thank you, Katharine, and good morning, everyone.

Thanks for joining us.

We started off the new year with very strong results.

Highlights included the following -- used unit comps increased by 6% due to growth in traffic partially offset by a modest decrease in conversion; total gross profit for CarMax increased by 15%; and gross profit per used unit increased to $2,224.

Our wholesale results continue to be exceptional strong.

Unit sales grew by 32% largely due to a significant increase in appraisal traffic.

Our appraisal buy rate remains higher than historical averages at nearly 31% and gross profit per unit was a little over $1,000.

We are pleased with our used unit comp growth this quarter, we achieved these results despite economic and marketplace challenges such as lower consumer confidence, high unemployment, elevated gas prices and escalating wholesale prices which have driven up average selling prices of both new and used vehicles.

CAF also had a great quarter and I'll ask Tom Reedy to share some information about CAF and our related finance business.

Tom?

Thanks, Tom; good morning, everyone.

CAF income this quarter increased $12 million or 21% compared to the first quarter of fiscal 2011.

As expected the CAF interest margin was up significantly over last year reaching 7.2% of average managed receivables, primarily the result of older loans rolling off and newer higher margin loans becoming a greater portion of the portfolio.

During the quarter we continued to experience a favorable lending environment and the interest margin on this quarter originations remained wide.

Our CAF portfolio grew 6% with net loans originated up 33% compared with the first quarter of fiscal 2011.

This increase reflected both the growth in our retail vehicle sales as well as our decision to dial back arrangements with third-party providers and keep a greater portion of the loans at CAF historically approved that it elected not to retain after tightening lending standards in 2009.

This action has no material effect on CarMax earnings for the first quarter as a slight increase in CAF income was substantially offset by a loss of fees from third-party finance providers.

In the quarter CAF's net loan penetration grew to about 34% compared to just over -- under 30% in both last year's first quarter and for fiscal 2011 overall.

The provision for loan losses was similar to last year, a result of better than expected loss experienced in the quarter and the related adjustment to our forward-looking allowance for loan losses.

Actual losses in the quarter were significantly less than expected primarily due to fewer charge-offs.

We believe this experience is consistent with others in our industry and reflects an improvement in our customer's ability or their willingness to pay.

Recovery rates also continue to record levels due to the strength in wholesale prices.

As mentioned in our press release, this favorability resulted in an increase of $0.03 per share in our earnings versus original expectations.

Credit availability in the stores continued at record high levels and the percentage of customers who actually utilized an in-house financing option was up modestly versus the previous year period.

Subprime payments pressure was consistent with last year at about 8%.

Tom?

Thank you.

We were pleased to successfully open two stores this quarter in new markets for CarMax -- Baton Rouge, Louisiana and Lexington, Kentucky -- and we're looking forward to three more openings throughout the rest of this fiscal year.

We also reported on our planned openings in the first quarter of next year; those will be in Bakersfield, California; Lancaster, Pennsylvania and our third store in Nashville, Tennessee.

Those will be the first three of the eight to 10 stores that we plan to open in fiscal 2013.

As you know, at CarMax we strive for continuous improvement in all aspects of the customer experience which we know will also add to our competitive position over time.

We focus on a number of potential areas including improvements in our existing stores, new store formats, new potential markets and online enhancements.

Our recent enhancements to CarMax.com include the initiatives we've mentioned on previous calls, the successful introduction of our new mobile application and our test of EasyShop in two stores in North Carolina.

As we move forward and gather more information we'll keep you up to date on the progress of these initiatives.

And with that we'll be happy to take your questions.

(Operator Instructions).

Brian Nagel, Oppenheimer.

Good morning.

Good morning, Brian.

Congratulations on a nice quarter.

Thank you.

A question I had -- and we've discussed this in past quarters, Tom.

Looking at your results and listening to your commentary with regard to traffic conversion, given those trends -- you said the uptick in traffic in the quarter and then the slight moderation in conversion -- do you think we're at the point now where CarMax could start to maybe give up a little bit on that gross margin per used vehicles sold and actually have a positive impact on sales?

And if so, is that something maybe we can think about as we look at our models through the balance of this year?

Well, as we talked about, Brian, that's something we're constantly evaluating.

And remember, that margin, the reported margin is an average so we run in lots of stores at different margin levels.

But some of what caused the lack of elasticity really continued in this year, probably bigger than we've ever seen.

We haven't seen a supply/demand imbalance dynamic like we're seeing right now.

Even back at the depth of the recession when we had that huge appreciation into the fourth quarter, that was kind of a one-time thing and it was an adjustment from the drop.

But what we've seen this year is just a continuation of increased prices.

Our prices are up to -- our average retail is around $19,000, up from around $16,000 in the fall of '08.

And we've was talked about that being a little bit of a tailwind for margin.

And if you look at it quarter over quarter, we were relatively -- we're pretty flat compared to last year's first quarter.

So it's something we'll always evaluate, but we're still in a very different dynamic in terms of supply/demand imbalance.

Okay, and then maybe a similar type question but in another way.

Looking at the sales trend, so we did have a moderation, as you highlighted as well, but a moderation from prior quarter levels.

Were sales through the quarter -- did you see, were there specific events whether it be weather or maybe some other type [trend story issues] within the quarter that hit your sales?

Or was it -- the number we saw for the full quarter, is that more of a reflection of the steady trend throughout the period?

Yes, we don't talk about trends through the quarter, that's how the quarter ended up.

Whenever we have weather or any type of event we always feel like -- different than in the grocery business or some other short cycle retail -- that we get those sales back eventually.

We did have some hailstorms hits which affected a few of our stores.

They hit early enough in the quarter that we don't think it really mattered, plus it was only in a few stores.

It did cost us some expense, more so than what we've had in the past.

But in terms of an impact we didn't see much.

Okay, congratulations again.

Thanks, Brian.

Simeon Gutman, Credit Suisse.

Thank you and good morning and let me add the congratulations on the quarter.

Tom, you mentioned conversion was a little lower at retail.

And assuming that your execution was solid, maybe that's just a proxy for higher prices and just maybe demand slowing a bit.

Should that be a signal to us that either the auction activity may slow in subsequent periods or that prices may just be too high and that should start to taper off a bit?

I wouldn't read too much into it.

We always like to -- when we talk about comps we have in the past talked about some comes from traffic, some comes from conversion.

When we look at it over time we generally think we should get about half our comps from traffic and about half our comps from conversion.

We have no reason to believe that that's different going forward.

We had a very slight decline.

If I look at this quarter's conversion, it's still higher than what we ran a few years ago.

I think your point on some uncertainty in the marketplace at higher retail -- I already said it, our retails are the highest they've ever been.

And I do still think there's still quite a bit of uncertainty out there in the economy and I think people are still a little bit skittish about pulling the trigger and signing up for a loan.

And despite all that we still had a 6% comp.

And you do have to look at the comp comparison back to the depth of the recession; the first quarter is a much tougher comparison than the fourth.

And the last piece is that -- you saw our wholesale number up 30%.

Our appraisal traffic is up a whole bunch, particularly on the wholesale side, and we measure conversion as a percentage of our total traffic.

So this disproportionate increase in traffic that is essentially appraisal only is going to have an impact on that math.

Right.

And I guess the appraisal traffic combined with the strength of pricing as well as gross profit at auction, we saw I think Manheim shut a few auctions down, it almost felt like things could have started to slow yet your numbers don't suggest that at all.

Well, the difference with us and the bigger -- we're now I think the third-largest auction chain in the country behind Mannheim and Odessa.

Mannheim and Odessa rely heavily on other people bringing cars there; they rely heavily on newer later model cars.

Our auction is very exclusive, it's only cars that don't meet our retail standards, it's only cars that we buy through the appraisal lane with the exception of a few cars that don't meet our standards that we buy off-site.

And it's a steady stream, we have the same attendants.

So our dynamic is very, very different.

So I just think it's difficult to compare us to the other auction chains.

And they're moving -- you see more movement on line for them and when there's movement online that oftentimes means that the car never is actually brought to the auction whereas every one of our cars is bought on site.

Even if we found a way to sell them online we'd still have to put them somewhere.

And I saw that the buy rate was high.

I mean, is that the same number or the ratio of the number of dealers at the auctions relative to cars?

No, the buy rate is of how many cars we appraise, how many of those do we buy.

And that number was a little north of 30%, which is at or right around a historical high for us.

So that's another indicator when we look at our margins to see if we think we're being fair, is how many of those cars we're buying, and we're buying pretty much one out of every three cars we appraise, so that's an indication that we're making solid offers.

Our average price at wholesale is up to $5,400, that's the highest it's ever been.

So it's just -- and our margins are only up $100 over the year.

So that means we've raised our offers to the consumer by almost $1,000 in 12 months for similar product.

Yes, and then I guess connected to that, are you seeing the ratio of --?

Oh, yes, the ratio is very, very strong; it's not the strongest we've ever seen.

But I think if you look at these two first quarters stacked on top of each other, last first quarter volume was up 52%, this quarter up 32%.

So our volume has just gone up dramatically.

But our attendance ratios are still very strong.

I think they're in the 1.3 to 1.4 range.

So that means if we run at 140 cars we get 100 dealers bidding on those cars at any given auction.

And that ratio is unprecedented in the industry.

Agreed.

And then my last question on inventories, can you just talk about how you feel about the positioning right now?

Pricing obviously is at an all-time high, but you have new production that will presumably ramp up and resume call it in two months from now.

That coincides with what is normally a used price depreciation time of the market.

So how does that play a role in your forecasting and building inventories right now?

We're pretty comfortable with where we are right now in inventory.

Historical depreciation usually happens later in the second quarter towards -- into the fall.

We'll see what happens this year.

I feel really confident in our ability to manage our inventories around whatever dynamic we happen to see in the marketplace.

The increase that you see in our inventory year over year, part of that is that our sales are up, part of that is that our average retails are up since we report in dollars.

And part of it is that we're in a better position inventory-wise this year than we were in last year.

Last year we felt we were other under inventoried, this year we felt more comfortable building.

Even now we feel fine about our inventory position going forward.

I don't think we'll see a huge drop-off in depreciation, at least we haven't seen it yet.

And even when we do, we feel well positioned to manage through it.

Okay, thank you very much.

Thank you.

Sharon Zackfia, William Blair.

Hi, good morning.

Hi, Sharon.

Hi.

I had a longer term I guess more strategic question.

My understanding is that you and the Board are kind of discussing the right rate of growth for CarMax longer-term, whether it's a percentage rate of unit expansion or a fixed number of stores per year.

And there are obviously positives and negatives from a P&L perspective for both of those.

I was just curious if you'd give us your perspective on as we look beyond fiscal '13 kind of what the Company looks like from a longer term growth paradigm?

Well, I think the biggest thing to note is the fact that we have so much growth out in front of us.

We are still only in half of US markets.

We still believe we're not fully stored in many of the markets that we're in.

I think the best part about our story is the growth that we have in front of us.

In terms of the pace of growth, we've announced eight to 10 next year, we have not updated that.

We obviously think about it all the time.

We have talked about having to build back up our infrastructure that we cut during the recession in both real estate, construction and management bench.

We're making great progress in all those areas.

We feel really good about our ability to grow the announced growth that we've already set, so the five this year, the eight to 10 next year, but we just really haven't updated anything past that.

But I will tell you that that still the single thing that we're most excited about is our prospects for growth going forward.

Okay and then maybe just a really quick question for Tom -- the other Tom.

I think the initial finance income guidance was $2.05 to $2.35 for this year.

And it looks like even if you exclude the $0.03 this quarter you'd be well on track to exceed that.

And just curious if you're going to update that guidance or if we just assume that it's not valid anymore?

Sharon, I think we're not -- you can assume that we're not going to update the guidance, but I think we are giving you indications of what is disconnected from where we were initially.

For instance the penetration in CAF is higher than where we assumed at the beginning of the year and the loss -- losses seem to be coming in a lot -- less strong from a loss perspective than we originally anticipated.

So I think we're giving you some tools to make your own decisions and that, along with your origination metrics that we'll give in the Q every quarter, will give you an idea of what's going on as far as the new originations.

Great, thank you.

Thank you.

Matt Nemer, Wells Fargo.

Good morning, everyone.

Hi, Matt.

So just a couple of questions.

Just to come back to an earlier question about the conversion, I just want to make sure I'm clear.

You're including wholesale or appraisal traffic in that number.

So mathematically it's down in part because the wholesale business has been so strong?

Yes, that's the same way we have always talked about conversion.

We've always included total store traffic of which some is people just coming to get their car appraised.

So that's the way we've always reported it.

Okay, all right.

I just wanted to make sure.

And then the second question is, you had a great expense performance.

And I'm wondering how much of that is due to the wholesale performance?

In other words, is the flow through a lot higher in the wholesale business because the incremental cost is lower there than it is in the used vehicle business or the retail business?

Some of it is just the change in the average retail as well.

We hold ourselves accountable to dollars per used units sold.

And on that measure we slightly delivered in the quarter.

So whenever we talk about percentages we don't want to give credit when our average retails go up or when wholesale volumes go up and we look at it on a total revenue basis, nor do we want to get penalized on the way down if we're managing the business well on a per unit basis.

But, we feel really good about where we are in SG&A.

We talked about it coming back, we talked about components of it coming back like commissions.

We did make an adjustment to our commissions this year for sales consultants, which had a little bit of an impact in the quarter.

We are spending more money on advertising on a per unit basis.

We spent more money this quarter than we did the year prior.

So I mean those are the kinds of things that we said that you could expect to come back as we came out of the recession.

I guess asking it another way, if you have an incremental dollar of profit in used retail and an incremental dollar of profit in wholesale, is the flow through of that dollar a lot different to the operating income line?

Yes.

Okay.

And then just lastly on CAF, so you've had sort of a -- I guess a one-time benefit in the first quarter for the last two years.

Is there -- how should we think about a normal loss provision in Q3 on a -- sorry, in Q1 on a seasonal basis?

I mean is it typically similar to the last nine months of the year or maybe you can give us a general dollar amount just so that on a go-forward basis we can model it properly?

I don't think we can give you guidance on what a normal world is, especially given the fact that we've had to adjust our loss expectations a couple of times in the last year and a half.

What I can say is we -- the driver of our better loss results came about half, maybe a little bit less than half, from actual experience during the quarter, fewer losses booked during the quarter, the remainder was adjustments to our loss reserve that are really driven by that loss experience that we've seen.

So (multiple speakers).

Yes, I don't think (multiple speakers) first-quarter phenomenon, I think it's consumer behavior has been changing over time; it happened to be the last two first quarters it had an impact that we needed to tell you about.

Right.

No, I just wanted to make sure -- we shouldn't be modeling that as essentially zero losses in Q1 on a regular basis, it should be closer to call it $5 million or $10 million?

No, we need to assess what we believe the appropriate loss reserve is every quarter and we're going to adjust to make sure that we are there.

And it just happened to be that the first quarter were the times that we saw the improvement.

What it tells you, Matt, before the first quarter started last year we told you what we thought and then at the end of the first quarter it was something different.

And that was the same thing this year.

It's not like we went into this here thinking well, at the end of this first quarter we'll have an adjustment.

At the beginning of this year we took all of our experience, we gave you the guidance that we gave you, and at the end of the first quarter our experience was different than we had anticipated just three months ago.

Right, okay.

And then I guess just lastly, the decision to retain more loans as opposed to flow those to third parties, is there anything specific around that?

Are you feeling better about the environment, we're out of the woods or just the profitability on the loans is so good you'd like to keep some for yourself?

I think you just answered your own question there.

I mean, we backed off of that business not because we thought it was overly risky, we've seen those loans perform at probably the worst environment possible and we've always said that we wanted to be in this business to the extent the markets will let us.

So I think it's a combination of those factors, it's a combination of the view on profitability versus passing it off to the partner, the view on our ability to fund it and the overall environment.

And I think we're comfortable stepping back in to some extent at this point.

Excellent.

Thanks.

Great job, guys.

Thanks, Matt.

Ryan Brinkman, Goldman Sachs.

Good morning, congratulations on a terrific quarter.

Clearly the wholesale volumes are very strong on strong comps.

How are you thinking about the drivers of these lines going forward?

I know you mentioned that appraisal traffic was the biggest driver, but are you doing anything different to drive appraisal traffic such as changes to advertising and did your buy rate also improve as customers were surprised how much their vehicles were worth?

In terms of advertising it's always been a relatively steady diet of we buy cars is what we call it, we buy cars advertising.

So, no, we have not had a big change in the way we market this piece of our business.

I think it's a dynamic that we couldn't have anticipated with consumer behavior around -- particularly around that segment of car -- the $3,000 to $5,000 car that we seem to be getting a lot of people bringing those in to sell them to us.

And as you can see, the volumes are very disproportionate to retail and have been now for well over a year.

But I mean that we could speculate on why that is, but in terms of our behavior being any different, it's not.

Okay --.

And I already talked about our ratios and buy rate.

Did you say what your self-sufficiency rate was for the quarter?

It was in the low 40s.

So it was up year over year a little bit -- up 3 or 4 points year over year and flattish to the fourth quarter.

Okay, great.

And then just last question.

You mentioned in the prepared remarks -- quickly you mentioned experimentation, even [thought] experimentation maybe with new store formats.

Is there anything you can elaborate further on this?

For example, could it possibly entail a smaller store format that could increase the ultimate store potential that had previously been estimated at roughly 300 or so?

Well, we've always said 200 to 300, but built into that 200 to 300 we contemplated a successful smaller store format.

And right now we are -- we're evaluating and working on it, but we don't have any plans in the announced growth phase that we've already announced.

But we'll get back to -- we had built Charlottesville several years ago and we talked about that being our small store format, and we do -- we will get back to building some small stores and testing them, but we don't have anything planned for this year.

Okay, great --.

The other format store we talked about I think I've talked in the past about evaluating our existing box and can we do something different and more creative.

And we're also working on that.

And we don't have anything to report on it yet, but I think we'll get -- really a newer format store is more of an evolution from our existing stores.

And I think we'll have something up and running by maybe the end of this year.

Understood.

Thank you very much.

Clint Fendley, Davenport.

Thank you.

Good morning, guys; great quarter.

In the last few weeks we've seen some of the buyer to seller direct competitors like Auto Trader providing online guarantees and really tightening their alliances with new dealerships.

Have you seen or do you expect that to impact your ability to procure your inventory here while supplies remain tight?

Well, we're well aware of that program, we're paying very, very close attention to it.

It's very difficult for us to see impact with the numbers that we've been delivering, a 32% increase in wholesale that's all bought through the appraisal lane on top of a 50% increase in wholesale the year prior, really record buy rates for us, big increases in our traffic in that area.

Right now it's just difficult to see an impact, but it's something that we're very aware of, we're paying very close attention to and we'll see, we'll see as it develops over time.

I know you guys have done a lot of work around up-front online offerings to your customers.

Does this new offering by Auto Trader accelerate possibly some of your beta testing that you are doing here?

We really haven't done much with upfront.

I'm not sure what you mean on that, upfront.

I know you have done some work to where the customer can come in and try to arrange transfers and things like that online without coming into the store.

And I wondered if maybe you would think about doing the same on the pricing for a possible appraisal.

Yes, I mean we are going to continue to look at what our options are.

But it is very, very difficult to put an accurate offer on a car without seeing it on a description from the general consumer population.

I think it is actually impossible to do consistently well.

Our research on the things that have been going on with Auto Trader is most of those offers are being redone once the consumer actually gets to the store, and that is kind of against the way we think we should do business.

So it doesn't mean we won't try to test some, giving the consumers much more information or as much information as possible so they can make an informed decision.

But in terms of coming up with a hard offer with somebody else entering their data in a system, I just -- I am not very confident in that.

Thanks, Tom.

Great quarter.

Thank you.

Patrick Duff, Gilder.

I'm good.

I actually got all my questions answered.

I couldn't get off, but I will just congratulations.

Appreciate it, guys.

Thanks, Pat.

Thanks, Pat.

Rod Lache, Deutsche Bank.

Good morning, this is Dan Galves in for Rod this morning.

I wanted to follow up on the wholesale business a bit.

Auction volumes were down about 8% in 2010.

CarMax wholesale volumes were up 33%, so obviously you are taking a lot of share from the auctions.

A few questions on that.

Do the auctions see you guys as a competitor, and is there anything -- any kind of competitive action that they could take to hurt you?

And on the other hand, do you have any testing in place or is there any potential for you guys to start consigning other people's vehicles in your own auctions?

On the first part, I don't think that mathematically if you went and did the -- if somehow it could be done, I don't think we are actually taking share.

We are looking at two completely different customer bases.

Dealers -- I mean, I'm sorry, auctions are recruiting dealers and banks and off-lease companies to bring cars to the auction and rental car companies and things like that.

We are only buying cars from consumers.

Every car bought individually for a consumer, we've never once brought a car in from a dealer to run in our auction.

So I don't think the auctions really view us as a competitor, nor do we view them as a competitor for that product.

We obviously compete for dealers to come and bid on cars, but not for the car themselves.

But in terms of consigning other cars, right now we have no plans to do that.

I don't think that's something that we would do.

We have an exceptionally high sell-through rate, we sell about 98% of everything we run.

The reason we can do that is because we own all those cars and we can make the decision to sell them.

I think it would add a level of complexity and it would be a whole different business for us to go out and recruit other people to bring cars to their auction.

And I think it would lessen the quality of auction that we currently run.

We focus on customer service in that business, just like we do on the retail side, and I think we run a great auction.

And I think that just adds potential to mess it up a little for us, slow down our turns and ultimately I don't think it's the right decision.

Okay, that makes sense.

And it is -- is there any point in the wholesale business where your kind of infrastructure, your capacity to continue to increase the volumes gets constrained and you have to invest in infrastructure facilities?

We've already actually done that in a couple locations.

We built a separate facility up at our Laurel store, we build an off-site and separate facility in Sacramento.

Every time we do that we're obviously looking at the return on investment required to justify the construction.

But remember that we only run auctions in about half our stores.

So we have lots of extra capacity to continue to grow the business, but it's absolutely a factor in our decisioning, whenever we go to a new market we have to factor in the acreage required to run an auction.

So when we go to new markets like we're going to go to this year like Bakersfield, California we have to think about what are we going to do with the auction cars.

Now a lot of times we'll open a store and we'll just run those auction cars at a different store and we plan from the beginning not to run an auction at that store.

So we'll open up Escondido, California in the next couple of months and that's a store that will not have its own auction.

But we plan for that in advance.

Okay, thanks.

And I've got just a couple questions on CAF.

Can you talk a little bit about how customer rates have trended since the last securitization?

Also, it looks to me like the cost of funding on some of the pools that are in the managed receivables, the cost of funding has gone up a bit in your disclosures.

Is that true?

And will that be a drag on future -- on the interest margin in future quarters?

I'm not sure where you're seeing the cost of funding going up.

I think all our recent deals have been pretty strong relative to history.

I guess I meant that if you take kind of, one, a particular loan pool from kind of the February disclosures to the May disclosures it looked like the cost of funding increased, I thought maybe because of the increases in the benchmark rate.

Is that not the case?

It may have, but remember we also hedge our benchmark risk as we're originating loans.

So what we're really trying to do is lock in that spread between APR and cost of funds at the time of origination as we originate.

Okay, that's very helpful.

And how is the customer rate been trending?

I think your last deal was like 8.6%.

Are the loans in the warehouse facilities, are they at higher customer rates than that or lower?

I think if you look at the last deal, we've been trending pretty consistently with that.

Except this quarter, as we talked about, we introduced more of the lower credit tiers back into the portfolio, we do that on a go-forward basis.

So you can expect to see that APR -- that average APR going up because the mix is shifting.

Okay, thanks for all of the great answers, appreciate it.

Scot Ciccarelli, RBC Capital Markets.

How are you?

Hey, Scot.

Tom, I know historically you kind of viewed $1,000 as an upper barrier on gross profit dollars for your wholesale units and obviously we've reached that this quarter.

What do you think the right way to think about that going forward is?

And I understand we're in a fairly extreme environment as you already mentioned in terms of supply/demand.

But just in terms of the gross profit dollars per wholesale vehicle, what do you think the right way for the investment group to think about it is?

Well, I wish I knew, Scot.

We've talked about $1,000 being the top end and we went over here and we talked about all the dynamics that led to that.

But we don't think that that's a sustainable number for us.

We've never really given specific ranges around our expectations because what we've always said is we're going to move our offers to make sure that we're buying a reasonable number of cars.

And at this rate of about one out of three it's hard to say we're not making good offers.

If we saw that number go down we would raise our offers and therefore lower our margins.

A lot of these customers who are selling us their car are also buying a car from us, so the most valuable piece of the transaction is not the wholesale piece, but it's that customer that also buys a car from us.

So we're going to move along with the marketplace, but we're also going to take advantage of the market whenever we can and that's the situation we're in right now.

And I do think it's a supply/demand imbalance that we've never seen before.

And I think when the (inaudible) goes back up a whole bunch maybe we'll see some movement in our appraisals, maybe we'll see some movement in our buy rates.

And I think that we will almost certainly see a movement in our sales.

So it's a pretty unique situation, I don't have a great answer for you.

I think these margins are very high and we don't expect them to be sustained.

All right, thanks for that.

And then obviously average ASPs on used units were up pretty sharply.

Can you talk maybe a little more specifically or give a little more color in terms of maybe the different segments you saw obviously?

I would assume that compact cars were up sharply, but did we see a lot of depreciation in like SUVs and trucks, let's call it less fuel-efficient vehicles?

For the quarter, Scot, there was -- remember at the end of the fourth quarter we talked about that movement being fairly steady from the beginning of the year prior to the end of the fourth quarter where we saw a big shift in sport utilities -- away from sport utilities and V8's and towards compacts.

We didn't see much movement from the fourth quarter to the first quarter.

First you're going to see a difference because, again, it started last year.

But from just specifically talking about the first quarter, we didn't see much movement from the fourth quarter.

All right, that's helpful.

And then --.

The appreciation to change our average retail was largely across the board.

Clearly compacts have moved more in the last 12 months, but if we're talking specifically about the first quarter it wasn't that much different from the fourth quarter.

Okay, got it.

And then last, looking for some clarification -- and I apologize if I misunderstood this -- but it sounds like you are financing more of your own vehicles.

Did you also say you dropped a couple of third-party vendors in that process?

Was that this quarter or is that you mean over time?

No, I think what we said what is the case is we reduced the number of loans that we're passing forward to the third-party vendors and retaining a greater portion of them ourselves.

But we didn't (multiple speakers).

We still have the same lender relationships.

Yes.

All right, it's just the number that you're kind of showing to the third-party buyers?

The program that we're referring to is one where CarMax Auto Finance was selling loans to the third-party guys that represented business CarMax used to do before tightening credit in 2009.

And what we're doing is getting back into that business to a greater extent.

We've over time continued to participate at a much reduced level from where we were historically to keep on top of the pool performance and experience with that line of business, and now we're in a position where we feel comfortable taking back a greater portion of it.

But it doesn't change the mix of lenders that we have in the stores.

Got it.

Thanks a lot, guys.

All right, Scot.

John Murphy, Bank of America-Merrill Lynch.

Hi, this is actually Liz Lane on for John Murphy this morning.

On inventory, I don't know if you give this metric, but I was wondering if you have inventory for the quarter on day supply basis and how that number compares to last year or last quarter and the year ago.

Yes, we report our dollars and our dollars were up year over year and I mentioned the reasons for that earlier.

Some were our sales increase, some is an average higher retail and some is just we intentionally had more inventory this quarter than we did last year's first quarter.

So in terms of actual vehicles you had more than last year?

Yes.

Okay.

And what was the average age, or at least directionally, of used vehicles sold at retail in the quarter?

Is that trending toward older vehicles due to a lack of available late-model inventory at all or is it pretty consistent?

Yes, I don't have that number in handy.

I don't think it's trended as much as people might think.

But we expect it to move to older because there's less supply in the market.

I mean the SAR went from 17 million down to 10 million and has yet to recover.

So all those cars are missing from the last three or four years.

I'm seeing if I can get you a little more specific information, but we don't have that handy.

Okay.

But generally that doesn't really impact your gross profit per vehicle at all?

No, and it certainly hasn't so far.

Right.

Okay.

And just one other one about store growth.

I know you're not changing your guidance at all.

But are there potentially enough trained store managers to raise that store opening schedule toward the higher end of the announced range or above?

And what are some other constraints if not management?

Well, right now we said five this year which is three more and then eight to 10 next year.

And we will be well positioned to provide all the resources required to get those stores open from a capital perspective and from a management perspective.

And whatever growth plan we decide to do going forward we'll make sure we're well-positioned to do that and we have plenty of time to get prepared between now and then.

Great.

Okay, thanks very much, guys.

Thank you.

Craig Kennison, Robert W.

Baird.

Good morning and thanks for taking my question.

On the wholesale business you're clearly selling more cars or buying more cars at wholesale and that rate of growth is faster than retail.

So does that imply that customers are choosing not -- I guess your trade-in customers are choosing to not necessarily trade in then buy a new car, but rather just liquidate their car and raise cash?

Or conversely, is that customer trading in a car at your store and then going to another dealership?

How should we interpret that data?

That's very difficult for us to figure out as well.

I can tell you that with the comp sales number that we had clearly some of them are buying a car from us.

The SAR was terrible in May, so it's just really hard to figure out what's going on.

I think the first point of some people just selling an extra car to raise some cash, that's definitely a possibility.

There really isn't great data out there for us to figure it out.

The growth rate in our wholesale business has been disproportionate to retail for quite some time.

We did have a dynamic where we had a decline in this business for a couple year's pre-precession.

We're actually still not doing as many appraisals today as we were pre-recession, believe it or not, even though we've seen these big increases.

So it would just be pure speculation to try to figure out what those customers are doing.

Remember, our offer to the consumer is we make a cash offer on any car whether or not they're buying a car from us.

And at the point of appraisal we're not really asking them because we want to make sure that that offer is the best offer that we can give to that customer for that car at that time.

And their particular situation of whether or not they're buying a car is really irrelevant to what their car is worth.

So I really could only speculate, but I think your first point is one that we think might have some merit which is that people are just selling extra cars here and there.

Makes sense.

Secondly, the subprime number, your mix of subprime was flat I think at 8%.

Is that a number you expect to remain flat or is there room for that number to expand?

That really just depends on the mix of customers coming through the doors, the appetite of our non-prime lenders and also how aggressive our subprime lenders are willing to be.

So it's hard for us to predict to give any kind of color as to where that should be.

One thing we can tell you though is our current subprime offering, if we got more of those customers in we would sell more of those cars.

It's not like they're saying hey, don't give us any more of this business; we're selling what the mix is that's coming through the door.

Got it, that's helpful.

And then finally, just I know you have some pilot stores on the smaller store format.

What are the economics of that store format and are they vastly different than what you see in other stores?

We don't -- we only have the one store which is in Charlottesville.

We have not yet gone into what we would consider a smaller -- we do have some smaller -- we have stores that sell 1,000 cars a month and stores that sell 200 cars a month.

So we have experience all over the board.

But our return hurdle is the same for any investment.

Got it, thank you.

Himanshu Patel, JPMorgan.

Hi, guys, this is Michael Kimlat in for Himanshu.

I just have one quick question from my side.

I wanted to get a sense on your provision for loan losses and charge-offs.

I want to know whether there is any seasonality here due to any tax reimbursements or anything like that.

When I look at the prior-year, the first quarter, the provisions were pretty low, but then they were significantly higher in the subsequent quarters.

So can you please just provide any color on this?

Yes, I guess the best way to address that is that our expectation at the beginning of the year included an adjustment for seasonality.

So the experience that we're seeing is above and beyond any normal seasonality for tax refunds or anything else.

As we said, we really believe that customers are finding money and either by -- because they have a greater desire to pay us or a greater ability to pay on us, we have seen fewer loans go bad and therefore are having to recover fewer cars.

And how should we think about this going forward?

I think we've got the loss provision which we believe is the best representation of our loss expectation going forward.

We look at every vintage of origination in our pool and we look at the experience of those originations and we come to a conclusion on where our loss expectation should be based on the composition of the portfolio.

We do that every quarter and we make our best judgment.

As far as where it goes going forward I can only tell you we'll adjust as we see different experience.

Just like we did over the last three years, both adjust down and adjust back up and you do the best you can with the information that you have.

But we're not going to try to speculate on where the market is going.

Okay, great.

Thank you, that's all I had.

Sam Yake, BGB Securities.

Yes, good morning.

I was just wondering, I had seen -- you had put out -- you had made a big deal about how you took a survey of your customers and I think 95% of the customers would recommend CarMax to a friend and I think it was 75% of people who didn't buy a car would still recommend them.

I'm wondering, do you have any update on those figures?

To me they're very critical.

I don't, Sam.

That was I think a couple years ago when we referenced that number.

I know that we look at our total satisfaction from our consumer base on a net promoter basis, if you're familiar with that measure, and our numbers have been very, very strong.

And in fact up from the recession to now.

So I don't have the specifics of the two things that you mentioned, but then terms of the way we measure customer satisfaction our scores have been very strong.

Would it be fair to say that customer satisfaction is better than it's ever been at CarMax?

Yes.

Okay, thank you.

And one other quick question.

You're building a little cash on the balance sheet and your results are very strong.

I'm wondering, do you have any plans to possibly do a stock buyback, at least enough to offset the dilution from stock options?

We've looked at that, we've looked at every possible use of cash and we still believe the best use of our cash is to grow the business and grow stores and invest in our future and right now that's our plan.

Having a little extra cash on the balance sheet is a good experience compared to two or three years ago.

And three years ago nobody was asking us what we were going to do with the cash that we didn't have.

So right now that's our plan.

We'll constantly evaluate our cash position and what we think the best use of that capital is and the long-term best interest of our shareholders.

Okay, thanks so much.

Continued good luck.

Thank you.

Thank you.

Bill Armstrong, CL King & Associates.

Good morning.

On CAF, your provision for loan losses was actually a credit.

If we back out the adjustment you made to the allowance what would the provision have been?

Are you asking if you annualized what the losses in the quarter were what would it be as a percent of --?

No, no, not annualized.

But you had a credit of $1 million.

You obviously had an adjustment to the allowance that is an offset to the balance sheet.

So in other words, how much was the adjustment?

In other words, what was the loan loss provision on a normalized basis?

The adjustment was about $10 million or $0.03 after-tax.

Okay, okay.

On customer traffic, is there any way for you to figure out what the impact might have been from either shortages coming out of Japan or the slowdown in the month of May in the SAR?

You mean specifically attribute changes in customer traffic to those things?

I'd say no.

All right.

Any way to have any sense from what the impact might have been?

No.

Okay.

Not that we know.

And then finally, just kind of bigger picture, what's your outlook in terms of looking at the industry and the social supply/demand imbalance?

Do you see that persisting for some time to come or what dynamics do you see coming towards us that may change that?

I don't think we would have predicted it to stay where it -- as long as it has really into the year and this quarter.

I don't think the SAR -- this is just my opinion -- I don't think the SAR can stay where it is.

I think a combination of population growth and the scrappage rate would just indicate that the SAR will go back up.

I don't know that it will go back to 17, I think somewhere between here and there is probably more realistic and I couldn't give you any idea of what the timeframe is.

I'd say that we wouldn't have expected to see what we've seen in the first part of this year.

I would have expected the SAR to recover more.

But again, I'm just speculating.

Right.

Do you see a return to full production from the Japanese manufacturers as perhaps helping to improve the SAR and then obviously the impact of that would be more trade-ins coming into the system?

I think that's a definite possibility and as we've always said, the SAR going up in any meaningful way not only impacts our appraisal traffic but has always in the past been an indication of consumer demand and consumer demand for the type of stuff that we sell.

So we've always said we think the SAR is low, we want it to go up, we think if it goes up it's beneficial to our business in many different ways.

Got it, okay, thank you.

Mark Mandel, ThinkEquity.

Thanks, good morning, everyone.

First a follow-up on CAF.

In the past you've guided with respect to the net interest margin expecting that to trend lower towards but not all the way down to that historical range of 4.5% to 5.5%.

Since then it's obviously gone in the other direction.

I was just wondering if you could give us a little guidance, a little more color as to how you expect that metric to progress?

Yes, we're obviously not good at it.

Yes.

And I think what we guided in the past was that we don't know what the right number is in the new world that it could very well be higher than it had been in the past.

But we're going to have to wait and see how that trends out.

So as Tom said, we're not very good at predicting it.

But I think we continue to believe, as we said last quarter, that it's not unreasonable to expect that that might compress due to competition, rising interest rates, whatever, it just hasn't happened yet.

Got it.

And then as far as -- the franchise car dealers are stepping up their used vehicle efforts.

Has that affected your business in any way to date?

And if not do you expect any changes in your dynamics going forward?

It's really -- it's another one of those things that's very difficult to us to gauge, even -- one of the bigger measures we have is what does our share gain that look like.

And we only report that on an annual basis and our share gain was strong last year and even stronger the year before.

We had a great comp sales quarter despite all the challenges that we've already talked about.

And it's not the first time that all the new car dealers have said they're going to focus on used cars.

That's been a pretty consistent theme for several years.

And I know things are a little bit different right now.

But I also think some of what's going on right now is a little shorter term, particularly around the Japanese situation with Japanese manufacturers and the shortage of supply there.

You see a lot of those dealers out in the marketplace in a much more aggressive way than they have been in the past.

So eventually I think that will subside.

But it's really difficult to look at our results and say that we've been impacted.

Okay.

And then another question.

On the reconditioning effort, any additional efficiency gains that you can call out?

No, at the end of the year we said we got 250 sustainable and we thought originally when we talked about this there was around 300.

I've said numerous times I think the last 50 will be a lot more difficult than the first 200.

But nothing to update since the end of the quarter.

And then service department sales slipped a little bit year over year, anything to note on that front?

No, nothing of note.

All right, great.

Congratulations.

Thank you.

(Operator Instructions).

Simeon Gutman, Credit Suisse.

Just quick before my follow-up.

Tom, I screwed up, I forgot to congratulate you on the Bruins.

Oh, thanks.

Related to the new car dealer, kind of related a little bit to the last question.

Realizing your strategic process is probably a long range one and you're taking into account everyone in the market, not just one channel.

But anything tactically that you do different in the near term, whether it's sourcing, advertising or even pricing, that you can do in response to the new car dealers, which they seem to be taking more share than they have been in the past.

So I'm just curious what any near-term reactions may be.

Yes, I mean, again, we're very pleased with the quarter that we delivered.

And from a strategic standpoint we continue to grow pretty much all aspects of our business in a very challenging environment.

So in the short term we're not really -- it's not like we're out there trying to change some core part of our consumer offer because we think it's starting to lose its luster.

So, no, nothing really in the short term other than try to do a great job with every customer when they walk in the door and give them an experience that they can't get anywhere else.

You've done a great job, but it doesn't bother you that maybe that extra customer could have been coming in your door, but now the new car dealer has an extra vehicle on the lot that caught their attention?

And you can't have all the share, but at least the rate that you were growing at seams maybe a little faster before the increased focus.

So whether there's something on the advertising side or social media side that you can even become more ingrained in the consumer's mind.

Our spending was up on advertising, as we talked about.

I think some of the initiatives that we've already discussed are also ways to continue to drive more consumer traffic.

Some of the stuff I talked about last quarter around what we call EasyShop and giving the consumer more ability to do things from home, I mean those are all efforts to make sure that we remain the leader in the industry and we'll continue to invest in those things.

But I mean, it's just when you say short-term -- short-term, everybody has a different definition of short-term.

We're not changing what we're doing in the next couple of months.

We feel like things are going pretty well.

But we are investing in our future.

Okay, thanks.

And there are no further questions.

I'll turn it back over to our presenters.

All right, thank you, everyone, thanks for joining us.

Thanks once again to all of our associates, thanks for all you do every day and we'll see you next quarter.

This concludes our teleconference.

You may now disconnect.