車美仕 (KMX) 2012 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the second-quarter fiscal year 2012 conference call.

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

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

(Operator Instructions).

Thank you.

Ms.

Kenny, you may begin your conference.

Hi.

It's Katharine Kenny.

Thank you all for joining our fiscal second-quarter 2012 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 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 to 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 facts 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.

I will turn it over to Tom.

Thank you, Katherine.

Good morning, everyone.

Thanks for joining our second-quarter conference call.

Despite a decrease in used unit comps of 2%, we reported strong financial results for the second quarter.

While we were disappointed by this moderate decrease in sales, we believe it was largely due to the weak economic environment and lower consumer confidence.

Factors that contributed to our results included the following; total gross profit for CarMax increased by 1.5%, gross profit per unit was relatively flat at $2,178.

Our Wholesale business was again a strong contributor to our results.

Unit sales grew by 23% largely due to a continuation of the increase in appraisal traffic that we've seen in recent quarters.

Our appraisal buy rate was also at a historical high of around 30%.

Wholesale gross profit per unit grew by $71 to $929 per unit.

Our CarMax Auto Finance also reported a substantial increase in quarterly income.

Tom Reedy will give you some details in a moment.

The average selling price of our used vehicles increased over 7% compared to last year's second quarter largely due to the continued increase in wholesale prices.

Our mix of vehicles sold was relatively stable for the quarter.

Now I will ask Tom to share some information about CAF and our finance business.

Tom.

Thanks, Tom.

Good morning, everyone.

As you saw in the release, CAF income this quarter increased $11 million or 21% compared to the second quarter of fiscal 2011.

Overall the CAF portfolio grew 9%.

Net loans originated was up 27% versus Q2 of fiscal 2011 due to higher CAF penetration and an increase in average selling prices.

As mentioned last quarter, we are retaining a greater portion of loans that CAF historically approved but in recent years had been purchased by third-party partners.

As a result, CAF net penetration for the quarter was approximately 39% versus 32% in Q2 last year and 34% last quarter.

Obviously we expect this approach to make more money for CarMax over time, but there is a negative impact on third-party finance fees relative to last year.

CAF's interest margin expanded to $86 million or 7.5% of average managed receivables versus 6.9% in Q2 last year.

Interest and fee income grew by approximately $4 million as the increase in the volumes of managed receivables more than offset the decline in interest income as a percent of managed receivables.

Portfolio interest expense is down $9 million year-over-year as older, higher cost securitizations pay down and deals with lower interest costs become a greater portion of our financing.

Second-quarter interest expense also benefited because we delayed in accessing the public ABS market for funding.

Consequently, a higher portion of our managed portfolio was financed in warehouse facilities which are short-term and lower cost.

As you may have seen, we priced our 2011-2 term securitization last week.

The wide interest margin environment we've been referencing before continues.

Our provision for losses in the quarter was up approximately $2 million year-over-year.

This is in line with our expectations given we are back to retaining a full spectrum of credit.

As far as credit availability in the stores, about 85% of our customers who applied for financing received an approval from at least one of our in-house lenders.

This is as high as it has ever been, similar to last quarter.

Subprime penetration was consistent with last year at approximately 7%.

Finally, with regard to liquidity and funding, the treasury team has been quite busy over the past several weeks.

In August we closed a five-year $700 million unsecured revolving credit facility, which replaced the inventory secured facility set to expire in December.

We also renewed the $800 million warehouse facility that expired in August.

And as you may recall, our other warehouse facility which is $800 million as well, expires in February.

Tom.

Thank you, Tom.

Also during the second quarter we opened our Escondido store.

This is our second store in the San Diego market, and we expect to open North Attleboro, Massachusetts and Chattanooga, Tennessee in the third and fourth quarters.

In addition to the three stores we previously announced that will open the first quarter of our next fiscal year, we also reported on our planned openings for the second quarter.

These include two stores in new CarMax markets in Florida, Fort Myers and Naples, and another store in our existing Los Angeles market in Oxnard.

We plan to open eight to 10 stores in fiscal 2013 and at the end of this fiscal year, we expect to report on our plans for the future.

At this time we will open it up for questions.

Operator?

(Operator Instructions).

Simeon Gutman, Credit Suisse.

Thanks.

Good morning.

Tom, reflecting on the 2% decline in the unit comp, when you strategize how to reverse that going forward, how do you separate out what is the macro or cyclical component, which it sounds like most of -- you are attributing most to versus what is competitive or secular?

It is always a challenge.

Just based on our experience and evaluating the variables that we've dealt with in the past, we felt like this was more external particularly with what you've seen with consumer confidence and all the other troubles in the economy.

We stay focused on our consumer offer.

We want to make sure our consumer offer is the best in the business and we continue to invest in the things that will improve our consumer offer.

Our average store still sells over 330 cars a month.

A negative 2% comp is not a big drop for us in volume.

When you look at what the average new car dealer sells, it is somewhere between 30 and 50 cars a month.

So we stay focused on what we are doing internally.

We're obviously going to closely monitor what we see in the competitive environment, but we haven't seen anything that leads us to believe that we are heading down the wrong path.

I know you don't provide a lot of I guess color on geography, but I guess it would help us sort of diagnose what is going on.

Can you help us a little on how broad-based -- at minus 2 or are there certain competitors in certain markets that -- or macro situations?

We -- as you said, we don't do a lot on geography, and we're not going to start now.

And then second on pricing gross profits.

So used ASPs were up and I think actually they accelerated in terms of growth rate versus the Q1, but you had the per vehicle gross profit declined on a year-over-year basis.

And it wasn't -- it was a fine number.

It may have been a little bit lighter than what we were looking for, but if you look back over the past eight years, this dynamic where the ASP is up year-over-year but the gross profit is down, that has only happened a handful of times.

So does that tell us something about competition, whether you are doing more on discounting?

Should we read anything into that?

I wouldn't read anything into it.

It is such a small change year over year, I mean I've talked about this before in the $20, $30, $40 range on the product that we are selling, you know we can't manage it that tight within $20 or $30.

So although you can look at some changes year-over-year or sequentially, we are still running our margins at all-time highs, and we've talked about that in the past.

And we've also talked about if we could we would trade margin for sales.

We still don't see that as viable in this market, but in terms of the change year over year, I wouldn't read into it at all.

Okay and just one last one for Tom Reedy.

On CAF's total penetration of financed vehicles, can you say what that was?

And then should we think about that -- is that a sales stimulant or is it just shift of mix of financed vehicles within a given period?

I think I said the net penetration was 39.

That means after three-day payoffs, we are retaining 39% of the business.

So pre that coming out the door, that means CAF is getting about 45% of sales.

And I think the way I would characterize what we've been doing recently is going back into business that we've historically gone into that we were previously letting partners purchase from us.

So not a sales stimulant, but more of a profit play for us.

Okay, thanks.

John Murphy, Bank of America Merrill Lynch.

Good morning.

Just a couple questions.

First, as we think about the new store openings -- we appreciate the eight to 10 store guidance for next year and don't really need any detail beyond that.

I know you're not going to disclose that right now.

But as we look at the recent weakness in these same-store unit sales, does it have any impact on how you think about that store opening strategy going forward, or do you think that this is just some short-term weakness and it doesn't hearken back to what we saw in the last three years where you stalled the store openings?

If you look at our financial performance with a negative 2 comp we still comped our earnings over last year.

When you go back to the recession when we went down 17, down 24, down 26, our earnings were obviously going south in a hurry which caused us to make different decisions.

That is clearly not the case here.

And comp sales are only one piece of what our business has become, and we've talked about being a diversified profit stream and Wholesale and CarMax Auto Finance are doing really well.

And from a financial perspective, we feel very well positioned to continue to go after the growth that is out there in front of us.

So it is not -- we have not wavered one bit in terms of looking at growth going forward.

Okay, that's great.

Second question, Tom, I think you kind of alluded to this in a previous question -- questions.

But is there any price list elasticity to demand that you are seeing out there at all right now when you are doing these tests?

Very little.

I mean still with the -- these average retails that we've seen throughout this fiscal year are all time highs for us, and the marketplace just because of the supply/demand imbalance has been driving all the price change.

And when you look at our margins and you think about a movement of $100 or $200 on a $19,000 car, it really hasn't made much of a difference.

Okay, and then on the unit sales as we go forward, if the new vehicle sales environment improves, as Toyota and Honda get restocked, do you think if we get a SAAR that clips above 13 million units in October and November that may help stimulate some trade-ins and really get your unit sales going in the secondary market?

We can't guarantee that but it has always been our belief that a high SAAR is good for us, and it is not just because of trade-ins.

It is an indicator of consumer confidence and demand.

I think if consumers are out there in bigger numbers and they are looking for a car and they are looking for a new car average price well over $20,000, a lot of them realize that they can get a great deal on a used car or get more than they thought they could get by coming over to CarMax.

And every time we've seen an increase in SAAR of any significance, we have benefited from it.

So there is two pieces.

Just you mentioned the trade-in piece, but we think it is an indicator of demand and that will benefit as well.

But we will have to wait and see.

And then just lastly, on CAF, the 39% penetration, can that go significantly higher?

And if you guys could just give us a rough idea of what the collateral spread was on the last securitization.

Was it above 7%, maybe between 7% and 8%?

Just trying to gauge what that --

On the collateral spread adjusting for the fact that we hedge, it is just below 7%.

And I'm sorry, on the 39%, as we mentioned, that is about as high as we have ever been.

We are buying a full spectrum of loans that we historically have bought.

We are still allowing partners to purchase some of those loans that we originated in the past.

So there may be a little upside in the event we elected to curtail that program fully.

But things are going pretty robust for CAF right now.

But do you think that can get to 50% or something like that?

I'm just trying to understand what the magnitude of the potential penetration increase could be.

Given our current approach to credit, I wouldn't imagine that.

We would have to change our credit profile that we go after to get that high.

Okay, great.

Thank you very much.

Ryan Brinkman, Goldman Sachs.

Good morning.

You cited a slowdown in traffic and conversion trends in the press release, and you attribute it to the slowing macro.

Just a now you spoke to low elasticity of demand but I was wondering if you think that the record ASPs in the quarter could also be contributing to the comp slowdown as consumers suffer from a sort of sticker shock?

That's one thing we've been concerned about.

I've talked about our prices being higher than we would like them to be.

I think right now just because of the lack of supply, it is -- used cars are at an all-time high, new cars are at an all-time high.

So sure, that could have been a factor.

I think that is what we talked about earlier what with the external environment, consumer confidence is down, and when you look at the product that we sell, it almost always requires a loan and somebody has to still go out there and be confident in their job and be confident in signing up for a -- loans are six and seven years long now on cars.

Okay, and you know this quarter you had an even stronger wholesale ratio, the ratio of wholesale sales to retail sales.

I think it was 83% this quarter.

Can you speculate as to what is driving this?

It really seems to have departed from the sort of 55% to 65% range we had become accustomed to seeing until recently.

Is it sustainable in your view?

I don't know if it is sustainable, and you are right; there has been a dramatic difference in the growth rate in wholesale and retail, and it has been very difficult for us to figure out exactly why that is happening.

We talked about it last quarter.

I said my belief is I think a lot of people are just getting out of an extra car to turn them into cash.

Again, the growth rate has surprised us also.

Last quarter we were up 30%, that was on top of a 50% growth rate in wholesale the year prior.

With a negative 2 comp this quarter, our wholesale sales obviously were up another 23%.

It is one of those things where we run a terrific wholesale business, we have a great marketing team to have an extremely high dealer ratio at our auctions so we get excellent price realization.

And we're going to keep running that business the best we can and we are prepared to handle big comps in that business.

But in terms of trying to figure out why it is happening or why there has been a disconnect, it had been very difficult.

Okay.

And then you guys in the past, you have been less quick to blame the weather.

You say that it is always a push over the longer term and that is to your credit.

But I was wondering, there was a major hurricane in the quarter.

It was at the end of the quarter.

What kind of impact did that have on your same-store sales?

Could that explain some of the slowdown?

Yes, we are still quick to not blame the weather.

So the hurricane did hit.

It went pretty much write up the East Coast.

That is where our highest volume stores are.

Our store teams did a phenomenal job of getting our stores prepared to make sure that our assets and our employees were all protected.

But in terms of how much power loss and with the length of time our stores were closed, it really wasn't very long.

That doesn't mean that consumers did not shop during that time because of wind and rain and just not a good time to go out and try and buy a car but it happened at the very end of the quarter.

We still have always believed that if there is any sales loss, we get it back later.

We don't really look at it in terms of its impact over the quarter.

Definitely my last question then.

It seems like most of the publicly traded new vehicle dealer groups, they've been trying to ramp up their used sale effort over the last couple years.

But this year especially maybe as to the anticipated recovery in SAAR has been pushed out.

They seem to be having a good degree of success at this.

Does their increased focus on used vehicle sales impact in any way what you do from a marketing and/or other perspective?

And could that explain some of the comp slowdown as well?

It's possible, but it doesn't impact what we do as long as we believe that our consumer offer is -- continues to be superior and our volumes would say that that is still true.

And one thing you have to remember is that the whole total of all the publicly traded new car dealers makes up less than 2% of one- to six-year-old used cars sold in the marketplace.

So it is one measure but it is a very, very small measure.

They are not in every single market that we operate in, and there is not a consistent concentration of one of the big publics in any of the markets that we are in.

They are kind of spread around.

So we look at it more broadly across all independent dealers and all consumers that are selling cars.

And we'll talk about market share at the end of the year but we've continued to have market share gains in this environment.

Thanks very much, guys.

Matt Nemer, Wells Fargo Securities.

Tom, could you talk to how you're thinking about advertising plans for the next few quarters given the negative comps that you reported?

So far at this point we haven't -- we try to manage our advertising on a per unit sold basis.

So if we had a much bigger comp number, we might be spending a little bit more money but in terms of a consistent program of getting our message out there, we have no plans to change it.

And then as a follow-up to that, any change in plans to the way you were thinking about investing in kind of new strategic opportunities?

If we comp negative or if you come negative for the next couple of quarters, does it make you rethink some of your investment plans?

Again, the comp is not the only variable that we have to look at.

But again with a negative 2 comp and -- but yet a positive earnings and strong performance in other aspects of our business including margin per car, CarMax Auto Finance and Wholesale, no.

We right now, we have no plans of changing our investment in our future and no plans of changing our going after growth.

Okay, and then this is more of a housekeeping question.

Could you just talk to the impact of the reduction in third-party finance fees?

You mean the dollar magnitude?

Yes.

The way I would look at it is it is a very minor impact overall net to CarMax.

You would see a reduction in third-party, an increase in CAF in the given quarter that doesn't quite offset it for the year.

We expect it to be kind of a neutral play and obviously over the long term much more profit to CarMax.

So Matt, you really got to think about it as the trade-off is not -- we don't really care what the impact is on the quarter.

We are making a trade-off for a much more profitable piece of business and the fact that we get it over time because of an accounting rule doesn't impact our decision to do it.

I guess what I'm wondering is because it is 100% gross margin and has really high flow through, did it have a material impact in the quarter that you reported?

No.

Okay (multiple speakers).

The switch is, Matt, the switch to CarMax Auto Finance is we don't -- we still get a portion of that income in that quarter.

So you take that portion of the income and you offset what you didn't get, and the difference is immaterial.

Got it.

Okay.

And then lastly, any change in thinking regarding a share buyback program?

No, not at this time.

We still believe it is in our best interest and our shareholders' long-term best interest to invest in growth.

There is still a lot of uncertainty in the economy.

Like a lot of other companies if we end up with a little more cash than we have had in the past, we think that's a good position to be in right now.

We do plan on going out and looking aggressively at land for our future growth and we've talked about that in the past, and we are going to continue down that path.

Okay, that's all I've got.

Thank you.

Patrick Duff, Gilder.

Good morning.

Thanks very much.

Just kind of two quick ones.

I don't -- I'm not going to try and get into guidance -- I know that is not anything you want to talk about.

But last year, there was a lot of concern in the third quarter because the gross profit per unit declined kind of roughly $100 year-over-year, which had been kind of the pattern for the Company over the long term.

And then that deviated kind of in the '08, '09 timeframe.

I'm just wondering would you -- without getting into any kind of numbers -- would you expect the seasonal decline in the gross profit per unit in this third quarter to be more like the long-term average?

It is too early to tell and we are going to manage each quarter based on all the things that are happening both external and internal.

And we are going to do the best we can.

So I can't give you any guidance on what is going to happen from this quarter to that quarter.

When you say there was a lot of concern last year, it wasn't from us.

I know.

I'm just trying to make sure we don't have a similar experience with everything else that's going on.

Listen, the only other question --

It depends a lot what is going on in the external wholesale environment.

We had some unique years in '08 and '09.

And so that is one of the factors that we have to look at.

We have to also look at what our current volume of sales are and lots of other variables, and we are just going to do the best we can to manage it through the quarter.

Okay.

The only other thing I just wanted to check -- with the increase in originations, anything you can kind of share with us in terms of credit quality of the book with the step up?

Has there been any changing in the credit scores or the customers and your overall comfort level with the quality of the loans?

As we talked about last quarter, this is a spectrum of business that we have become really comfortable with over time, and CAF has been buying for several years.

The reason we dialed back on it over the last couple years has been because of the capital markets and our view on our ability to finance that business efficiently and what it would do to our overall portfolio from a financeability perspective.

So as far as the credit risk associated with it, we are completely comfortable with it.

It is paper that we have been originating for a long time.

We've continue to originate a portion of it during the period where we were selling pieces off to the partners so that we have experience with that pool and we are comfortable with the credit.

As far as the financeability of the portfolio, obviously we believe we can finance the portfolio in today's market with the new credit spectrum.

And yes, it is lower because it is the lower end of what we used to purchase.

But again, it is a portfolio that the market has seen before.

Okay, great.

Thanks very much.

And it's a portfolio that the market is willing to buy, and that is the key is will take as much as we think we can fund efficiently.

Okay, good luck.

Brian Nagel, Oppenheimer.

The first question on the used car unit comp number, and Tom you mentioned in your prepared remarks and in a press release that you attributed the weakness in sales to macro factors.

And no one is going to argue.

We have seen a number of weaker macro data points particularly late in the summer.

But what perplexes me a bit is that we've looked at some of the reports from -- you said the used car -- the traditional new car dealers which are now selling more used cars and among others we've seen -- we saw better indications of used car sales lately.

I recognize and the market is very fragmented, but what gives you the confidence that the weaker trends in CarMax are more a function of the macro environment as opposed to heightened competition in the space?

Just our experience with running the business for a long, long time and looking at the incredibly small bases that others are reporting on.

Some of these average used car sales are at 30 cars a month, and it goes up 10%, that means their sales went up by three cars in those individual stores.

And our stores have much bigger sales volumes I mentioned average around 330.

I'm not saying that that isn't a factor.

I'm saying based on our experience in the business we think this quarter was mostly macro related.

But we are always paying attention to the competition.

We are always trying to sharpen our consumer offer and make sure that we are the number one choice for consumers in every single market that we operate in.

We have a lot of things that we continuously look at in terms of customer satisfaction and why people are choosing us or not.

And I can just tell you from all of those all of that data, we feel very confident that our consumer offer is still superior.

Is there anything as you look across your chain across the country, is there anything -- was there more volatility geographically here in Q2 than in Q1 or in last year?

We are not going to split out geography.

Okay, the final question on the gross margin per used vehicle sold, it wasn't that weak but it was weaker here in Q2 than it had been.

How should we think about kind of the factors behind that?

I wouldn't think about it at all.

We think it was a really strong quarter on margin per unit.

Compared to last year -- what was the change?

$27.

$27 is just not a -- that's not even a manageable number for us.

Okay.

I just wouldn't read into it at all.

Got it.

Thank you.

Craig Kennison, Robert W.

Baird.

Good morning.

Thanks for taking my questions.

Most have been answered.

But maybe on the housekeeping side, could you address your direct source mix, your buy rate and the percentage of subprime sales?

You mean percent of cars sold that we buy through the appraisal lane --

Yes.

-- that we retailed?

Yes, that number in the second quarter was all the way up to 50%.

So that is a number that we haven't achieved in several years.

I think we were in the low 40s at the end of the first quarter.

So what you've seen in wholesale where we've continue to see this big increase in units sold, it also moves over to retail as well because we are buying lots of cars in the appraisal lane.

Some of those are wholesale, and some of those are retail and the percentage that we are buying has continued to increase during the year.

So that number is around 50%.

Our subprime percentage for the year was 7% which is similar to last year.

Do you have a sense for what the direct source mix contributes to your gross profit dollars per car?

We do.

It is a more profitable source for us, and it can help by just shifting the mix but we manage margins across the board.

So if that mix went up, we have to make a decision whether or not we want to just keep the margin that we get as a benefit of a shift in mix or do we want to take some of those margin dollars and lower prices on off-site purchased cars to try and drive incremental sales.

So when you see the margin relatively flat to the first quarter and you see our cars -- our self-sufficiency go up to around 50%, then there was some of that happening in the quarter.

Lastly, can that 50% number move higher or do you think it will be more correlated to slower trends or slower growth rates in the wholesale business?

If you asked me that at the beginning of the year, I would have said we wouldn't have continued the wholesale growth rates that we've had.

If wholesale continues to outpace the growth of retail sales at the rate that it has been going and then along with that, the cars that we upraise in the appraisal lane for retail also continue to go up, then the number will continue to go up.

Excellent.

Thank you.

Scot Ciccarelli, RBC Capital Markets.

I guess my question, Tom, is could you remind us broadly what you saw happen to your business back in 2008 when comps started to massively decelerate?

And maybe compare and contrast what you are seeing today with the consumer versus what you started to see in early 2008 as that sales decline accelerated?

The biggest difference is the sheer magnitude of the drop.

Negative 2 is relatively flat for us.

But I'd say one of the other biggest changes is between then and now, we are running our business a lot more profitably on a per unit basis than we were then not just on margin per car, but on contributions from CarMax Auto Finance and Wholesale as well.

So we are a different company than we were pre-recession and the diversified profit stream that we've built over time is helpful.

And when things dropped last time, everything dropped.

Finance profits dropped, wholesale profits dropped, margin per car dropped, sales dropped.

What we are seeing now is a little more moderate in terms of the sales drop obviously at a negative 2.

The second quarter of the recession was a negative 17.

But the thing that continues to give us confidence is the profitability in the other parts of our business and margin per car is more profitable than it was then.

So there is a lot of differences between then and now.

But what about the consumer impact?

You talked about slower traffic and lower conversions.

Did you have a similar experience back then?

Was it both traffic and conversions and just to a greater degree?

If you remember the, it was pretty much all traffic.

The consumer just stopped coming to the store.

That has not been the case in these last couple of quarters if you look at comp traffic.

It has been pretty close.

Then you could almost -- it was almost exactly the drop in sales was traffic.

So when you get to the fourth quarter, we were down 26%, and our traffic was down about that number.

And we haven't seen a traffic drop like that.

Now look, the other change here is these average retails are at their all time highs and they haven't moved.

In '08, our average retails went all the way down to $16,000 by November.

And we are pretty much -- we are selling the same stuff.

It's a little bit older now but that same car now is $3000 more expensive because of the supply/demand imbalance.

And one other thing I want to remind everybody is there has been some questions about what other new car dealers are focusing on used cars.

We have a full spectrum of used cars available, and have a bigger selection of cars at the lower price range in terms of one- to six-year-old used cars than anybody else in the marketplace.

So it's a little deceptive to look at our average retails up over $19,000 when you don't look across our 35,000 cars in inventory and look at the price selection that we provide for consumers.

I still think we have the best selection of lower-priced cars of one- to six-year-old cars at the quality level that we sell them.

That's very helpful.

Then with Manheim data starting to indicate at least some moderation or softening in used vehicle prices, obviously it has been a long time coming, but how quickly do you think that starts to impact your ASPs?

And what is the implication for gross profit dollars per unit?

I think it all depends on how quickly the SAAR moves.

And again, what happens with the consumer.

So to see depreciation in the fall is nothing new.

It is just we hadn't seen it for the last couple of years.

In terms of its impact on margin, we will manage it the best we can in each quarter, and hopefully we can keep it pretty stable.

We've been able to do that in the past with much bigger swings in both depreciation and appreciation.

So I'm confident in our ability to manage through it.

Great.

Thank you.

Rod Lache, Deutsche Bank.

Good morning, everybody.

I just wanted -- I had a couple things here.

Comps historically as you pointed out were most correlated with the new vehicle SAAR.

And new sales during the quarter ended August were up something like 5% for the industry.

So I'm just trying to clarify exactly what you are saying about performance.

I think you indicated a few times that share was more or less stable.

So is this a fluke or does it say something in your opinion about the attractiveness of new versus used?

I think our belief is more that it is over a longer period of time.

SAAR at 12.2, up 5% is a horrible SAAR.

We would like to see it 15, 16, 17, get back to where it was.

I know nobody thinks that is going to happen anytime soon.

But I say that in general directionally, we believe that we will move with SAAR.

It doesn't mean that it is exactly tracked where if SAAR is up five, we have going to be up five.

So I think if we saw the SAAR go from 12% to 15% in the next 12 to 24 months, we would expect our sales to go up during that time as well based on our performance in the past.

Okay.

And I was hoping you might be able just to address over the next year or two, obviously that the population of one to five or one- to six-year-old vehicles that are available for sale is going to decline just because we had this big downturn.

Can you just give us some thoughts on how that affects your business model?

Does it affect the cost of preparing vehicles?

Does it change the way you approach the market in any way?

It does impact our business.

We, as you said, there are a lot less cars out there in the marketplace.

And I think that is why we have seen what we have to pay for those cars go up so much and our average retail up so high.

Now we haven't seen a big, dramatic shift in the average age of cars sold.

But if the SAAR stays where it is, I think it will continue to shift in that direction.

If what we sell on average continues to get older, then it will.

It will change -- it will affect the dollars that we spend on reconditioning because an older car with higher mileage requires more reconditioning dollars to get it up to the quality standard that we demand.

So when we think about our spend and reconditioning, we mix adjust it.

So we clearly expect to spend more money on a seven-year-old car with 80,000 miles than we do on a one-year-old car with 5000 miles.

So if our inventory was to shift, we -- I don't think we -- we are not looking at it and thinking what is the big impact it would have on our business in terms of cost because we would expect those costs to go up, and we manage to that number.

Okay.

And just lastly on CAF, could you just give us some thoughts on what your objectives are for penetration rates?

Is it something that you expect to continue climbing?

And just a data point, if you could share with us what the charge-offs were in the quarter?

As far as penetration rate, as I mentioned, we are at 39% net, which is as high as we have ever been.

And we are buying across the full spectrum of loans that we have historically bought across.

That said, there was a little bit of room because we are still selling some of that CAF business to third-party lenders.

But as far as increasing -- deliberately increasing our penetration, we are at a level we've been comfortable with.

We constantly evaluate that and just like our mix on the inventory side in pricing, we are constantly trying to optimize based on what is going on in the capital markets and what is going on with customers.

And we will continue doing that going forward, but I don't see any dramatic changes in the immediate future.

And the charge-offs?

We will get you that.

I don't have it in front of me.

Great.

Thank you.

Bill Armstrong, C.L.

King & Associates.

Good morning.

So you mentioned that traffic generally soft and you have a very strong increase in your appraisal traffic so people are coming through the stores.

Are you able to track on an individual transaction basis if a person sells you a car, are they also buying a car or not buying a car?

Can you give us any color on that on trend there?

We have tracked that.

We've talked about that number in the past.

In the past, it has been about, about --

From the spread between used-car prices and comparable new car narrowing and making those used cars a little less competitive in the market?

You know, it's possible, but we haven't seen that just from a pure statistical standpoint.

If you just look at the average new car and average used-car, the spread hasn't shrunk to the level where we think it would have an impact but could it have?

Yes, possibly.

Do you think you also had any impact perhaps from shortages of Japanese cars perhaps at the beginning of the quarter in the wake of the tsunami and earthquake?

Not really.

I don't think that has been much of a big factor when you consider that there is a shortage of all cars because of the SAAR being down for so many years.

I think that is what has driven -- I think the impact of the shortage of Japanese cars is a fraction, a fractional impact compared to the shortage of overall new cars sold over the last several years.

Again, our average resales have gone up $3000 since the fall of '08.

Got it, okay.

Thank you.

Himanshu Patel, JPMorgan.

Good morning.

Just had a couple questions, a little but more color on the minus 2% same-store comp.

I know you don't like to talk too much about the cadence throughout the quarter, but I guess it would be really useful to know if there was any sort of cliff event in demand around the debt ceiling debate?

And then perhaps you saw some sort of rebound and maybe that is the reason why you sound still relatively optimistic and have unaltered investment plans.

Or was it just a kind of continuous soft traffic pattern all throughout the entire quarter?

We're not going to talk about cadence through the quarter.

Okay.

And then you mentioned subprime mix for you guys was roughly flat I think year-over-year.

What about the competitive landscape?

Can you talk a little bit about credit underwriting standards from third-party lenders for subprime right now?

For subprime?

Yes.

Yes, I think it is consistent with where it has been.

It's exactly in line with -- maybe 2/10 of a percent different than last year, but we are seeing consistent support from subprime lenders.

And just any thoughts on kind of the direction of used car prices through now and year end as at least a couple months ago there was some strong expectations that new car incentives would accelerate and therefore used-car prices could come down as well.

Are you guys sort of at the same view at this stage?

You know, we are not -- at this point, we don't know.

We are not really sure.

As someone mentioned earlier, the Manheim data says that there has been some depreciation here recently which is different than the last couple years.

But it has been so volatile over the last few years, it doesn't do us a lot of good to try to predict what is going to happen two months from now.

Okay, thank you.

Ryan Stevens, Philadelphia Financial.

This is actually Jordan Hymowitz.

Question, on your wholesale vehicle per car, is there a sense of what the new normal is?

I mean the new normal obviously isn't the 300 originally in the White Paper but it's not probably 950 either.

I mean, what do you think a normal level is or is there no i.e.

to tell anymore?

I don't know that there is a new normal.

I said last quarter I didn't think we would get to 1000, and we did.

So again, it is one piece of the puzzle for us.

And it is an area that, as I said before, we would give up wholesale margin for retail sales in a second.

We just haven't had the chance to do that.

And with the volumes that we have right now in our appraisal lane and the buy rate that we have, you know what that tells us is we are making fair offers for those cars.

We are buying approximately one out of every three cars that we appraise.

Yet we are getting phenomenal attendance in our auctions, so we're getting great price realization.

So it is very difficult to say what normal looks like.

We've also seen the average price of what we sell for a similarly aged unit go from -- I don't know, $3500 to $4000 just two to three years ago up to $5500 now.

And it is essentially the same stuff.

So it's a pretty unique environment right now in terms of supply and demand, and all our indicators say that we are making very, very fair offers but then we are getting great attendance and great price realization.

But I have no idea what the new normal is.

And then if you look at ADESA or Copart -- ADESA more directly -- I mean their auction volumes are collapsing, and every quarter is down as much or more than the indices.

And you guys are gaining a lot of share.

Do you see more and more dealers coming to you in any way to sell their cars as opposed to just individuals?

We don't buy any cars from dealers that run in the auction.

So it is all consumers.

Okay, so maybe more and more customers are taking their cars to you guys to sell as opposed to trading them in.

Don't know, but maybe.

But it is -- we only let dealers come to the auction but we don't buy any cars from dealers.

We don't run anybody else's cars at our auction.

We are the third largest auction chain in the country now but we are still a very tiny percentage compared to a Manheim or an Odessa and Copart is a tough comparison because they are pretty much all salvage.

Okay, thank you and congratulations.

Mark Mandel, Think Equity.

Hi good morning everyone, just a follow up first of all.

You mentioned reconditioning, Tom.

Could you give us some numbers in term of efficiencies that you are seeing?

I know you have talked about this in the past.

Yes, we updated at the beginning of this year and said that we thought we'd got $250 of sustained improvement on reconditioning costs, and we don't have any reason to change that or update it now.

What I was referencing is a shift in mix.

If the number we gave you, the 250 number is -- it has to be a mix adjusted number to be accurate.

And if I was just saying that if our inventory, because of a lack of supply continued to get older, then our reconditioning dollars would go up.

But it would be something that would be a plan to go up because again, we expect to spend more money.

Since we have the same quality standard for an 8 year old car as we do for a one year old car, we would expect to spend more reconditioning dollars on an older, higher mileage car.

So on a year over year basis was it pretty much a wash in the second quarter in terms of what you are spending?

I don't know, I didn't look at just the pure dollars spend.

Again, we always look at it mix adjusted.

So, we don't have any reason to change the number we gave at the beginning of the year.

Okay.

And then my second question on inventory, year-to-date we've seen a relatively small increase in inventory, about $12 million.

Precisely is this a function of just a lack of supply, the prices that you have to pay or just cautiousness on your part?

If you just look at our ASPs, it explains half of the inventory difference for the quarter.

About half of what is left is new stores that we didn't have last year so the balance of that is minimal.

And as far as the mix of inventory, can you give us any color as to what is in the stores right now?

Our mix in terms of like sport-utility and compacts, remember we talked about a shift I think at the end of last year.

Correct.

Since then it has been pretty relatively stable.

First quarter to second quarter we saw not much in terms of change of mix.

We are seeing our inventory age a little bit more, which would be expected, but in terms of the mix of products sold, it didn't move much from first to second quarter.

And when we've seen big movement in inventory mix as it relates to say sport utilities or compacts or things like that, that is generally directly correlated with a spike in gas prices, and gas prices have seemed to stabilize over the last several months so we really haven't seen much movement in mix.

How about by brand, or the cars that are in strong demand?

We haven't seen much change there.

Finally, in terms of the loan loss provision, obviously it has bounced around a bit.

You had a small credit in the first quarter, and then I believe a $10.8 million provision this quarter.

Could you give us, share any thoughts with us in terms of what you are thinking for the rest of the year and how that might play out?

We don't -- if we were thinking anything different for the rest of the year, it would be embedded in that loan loss provision and our current allowance for loan losses.

I can give you some color.

If you remember last quarter we saw a pretty significant improvement in loss experience, and that improvement was driven primarily by payment experience rather than the increase in recoveries.

So we are still seeing a strong wholesale recovery rate, and I think the increase in -- or the increase in our experience in loss is offsetting somewhat to a great extent the increase in the spectrum of credit we are buying.

So we are buying further down the food chain in credit but we are seeing losses improve, and that is reflected in our number there.

Okay but you still had -- it was still a noticeable increase year over year, $10.8 million versus $9 million.

I mean is that something we should think about for the third and fourth quarters?

I think it is in line with our expectations.

The portfolio is significantly bigger, and we are buying a little bit different paper.

Got it.

All right.

Thanks a lot.

Efraim Levy, Standard & Poor's.

I just wanted to know as far as the appraisal to traffic on the buy rate, how are we comparing now versus the prerecession levels?

Do you think we are still below?

You mean total appraisal volume?

I actually don't have that handy.

And as far as with the gas prices stable, I assume that mix shift has probably been also pretty stable?

Yes, as I just said, it hasn't really changed much from first quarter to second quarter.

All right.

That's it.

Thank you.

There are no further questions at this time.

All right.

Well, thanks everyone for joining us.

I want to once again thank all our CarMax associates for all they do every day.

I especially want to give a special thanks out to all those who have helped us to prepare for the hurricane and get our stores ready.

Did a phenomenal job.

And lastly, I want to thank Keith Browning.

Keith is our retiring Chief Financial Officer.

This will be his last call.

You didn't hear him speak today.

But Keith has been an enormous contributor to the business.

We wouldn't be the company we are today without his contributions.

If you look at his combined tenure with Circuit City and CarMax, he had his 29th anniversary just two days ago.

We are going to give him a little round of applause here in the room.

And I just want to personally thank Keith for all he has done for me.

I've learned a lot from him in the last five years, and we wish him the best of luck in his retirement.

Thank you, Keith.

All right.

Thanks, everyone.

This concludes today's conference call.

You may now disconnect.