車美仕 (KMX) 2013 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the first-quarter fiscal year 2013 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.

I will now turn the conference over to Katharine Kenny.

Good morning.

Thank you for joining our fiscal 2013 first-quarter earnings conference call.

On the call with me today, as usual, are Tom Folliard, our President and Chief Executive Officer, and Tom Reedy, our Executive Vice President and CFO.

Before we begin, let me remind you that our statements today regarding the Company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

These statements are based on Management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations.

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

For additional information on important factors that could affect these expectations, please see the Company's Annual Report on Form 10-K for the fiscal year ended February 29, 2012, filed with the SEC.

Before I turn the call over to Tom, let me remind you that after our prepared remarks, we ask that you limit your questions to just one per caller, in order to give everyone a chance to ask a question.

Please feel free to return to the queue with any further questions, and thanks for your understanding.

Tom?

Thank you, Katharine.

Good morning, everyone.

Thanks for joining us today.

Used unit comps for the first quarter were flat compared to last year.

Excluding appraisal-only traffic, we believe our traffic was somewhat lower than last year, but we are pleased that the continued strength of our overall execution allowed us to maintain our solid per-unit gross profit for both used and wholesale vehicles.

Our focus on new store growth continues to gain momentum.

In the first quarter, non-comp stores drove our overall 3% growth in used units.

Total used vehicle gross profit grew by 3%, and used vehicle gross profit per unit was similar to last year's strong first quarter, at $2,221.

Overall appraisal traffic grew, but wholesale unit sales decreased by 2%.

This was largely due to three factors-- Extremely difficult comparison in the last two first quarters of 52% and 32% growth; a slightly lower buy rate; and a shift in the calendar that resulted in one less Tuesday, which is one of our auction days.

Excluding this calendar shift, we estimate wholesale units would have been flat to last year.

Our wholesale gross profit per unit declined somewhat from our all-time high of over $1,000 last year, but at $980 represents the second-highest in the Company's history.

Cap quarterly income continues to be a strong contributor, growing by 8% to $75 million.

During the quarter, sales of five-year and older vehicles as a percentage of our total sales remained at historic highs, above 25%.

Sales of SUVs and trucks remained about the same as a percentage of our total quarter-over-quarter and year-over-year.

As we've discussed before, our mix of vehicles will continue to vary, based on consumer demand.

I'll now turn it over to Tom to talk about cash.

Tom?

Thanks, Tom.

Good morning, everybody.

Cap income was up $5 million or 8% compared to the first quarter of fiscal 2012, and our portfolio of average managed receivables grew 16%, to more than $5 billion.

Growth in earnings lagged the growth of the portfolio, due to the year-over-year increase in the loss provision.

While we experienced continued positive loss performance in the first quarter this year, we were up against a tough comparison.

Remember, loss experience actually resulted in the provision being a credit in Q1 of last year.

Absent favorability in the loss provision in both periods, income growth would have more closely resembled growth in the managed receivables.

Increase in managed receivables was largely driven by strong origination volumes over the course of fiscal year 2012 and into fiscal year 2013, which were lifted by growth in cap penetration, increased average selling prices, and CarMax sales.

Cap penetration grew over the past year, as we have moved back to a pre-recession origination strategy, and taken volume back from third-party lenders.

As you may recall from our prior conversations, this was always our plan.

We started taking this volume back in early fiscal year 2012, and by January of this year, had transitioned to retaining it all.

During the first quarter, cap financed 37% of retail vehicle sales versus 34% in the prior-year period, and our loans originated increased 14% versus the first quarter of fiscal 2012.

The move to a pre-recession strategy is also apparent in the allowance for loan losses, which increased $12 million or 36% to $46.6 million.

The increase is not a reflection of any deterioration in performance.

Adjusted for changes in the underlying credit mix, receivable performance has continued to improve.

Access to financing for our customers continues to be very strong, with more than 85% of applications receiving at least one approval.

Third-party or sub-prime providers accounted for about 16% of sales in the first quarter, a level similar to the fourth quarter of fiscal 2012, and that compares with 8% in last year's first quarter.

We typically experienced our highest sub-prime volume in the fourth quarter due to tax refund season.

However, this year, originations by our sub-prime lenders ramped in Q4, and remained relatively strong through Q1.

As I mentioned last quarter, we are seeing some deterioration in the credit quality of applicants, but the majority of the increase is the result of our sub-prime partners providing more attractive offers to our customers.

You may have noticed that unused capacity in the warehouse facility was down to about $350 million at quarter end.

Since then, we priced and closed our second public ABS deal of 2012, sized at $940 million.

Now, I'll turn it back to Tom to wrap up.

Thank you, Tom.

I'll talk about new stores for a minute, and then we'll open it up for questions.

First, since resuming growth, our new stores in aggregate are performing slightly above our sales expectations, and we are very excited about our store opening plans over the next several years.

As you know, during the first quarter, we opened two stores in new markets, Lancaster, Pennsylvania and Bakersfield, California.

In June, we also opened a third store in our Nashville market and our first store in Fort Myers, Florida.

You will also note that in today's press release, we included three planned openings in new markets for the first quarter of our next fiscal year in Columbus and Savannah, Georgia and in Harrisonburg, Virginia.

Harrisonburg will be the pilot for our updated small store concept.

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

Operator?

(Operator Instructions) John Murphy of Bank of America.

As we look at the used unit volumes, which were flat year-over-year after a quarter of positive growth, how much of that stagnation would you attribute to lack of supply versus lack of demand?

And on the demand side, are you seeing shift away from used into new, or is that not really what's going on?

It's a variety of factors and it's really difficult for us to say that there's a shift from used to new, but the lack of supply is not just, it has multiple impacts on our business.

One, we have historically performed kind of our sweet spot has been one to three year old cars and obviously there are less of those available, you have seen that with our mix of inventory shifting towards older stock.

But the other part is there's just been this appreciation across all segments in the wholesale business that have caused these really high retail.

I believe its having some impact on our sales.

I also think that the weak economy and high unemployment rate continues to be a drag on the consumer.

Okay, thanks.

And as new stores open up, is there a higher cost associated with sourcing the inventory for those stores?

In other words, how much of a difference is there between average gross profit per unit in a newly opened store versus one that's been up and running for a while?

Our average profits, we manage them pretty consistently, and it's not that there's a big difference in the newer stores, but they are obviously starting off at a much lower sales rate and they are carrying a much different load of SG&A.

Okay, great.

Thanks very much.

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

Good morning.

Thanks for taking my question.

On the advertising program you have, how satisfied are you with the return on investment, and just how effective do you think that advertising program is?

I wish we could measure advertising better than we can.

We're a firm believer that we need to continue to build our brand.

Obviously, we wish we got a little more traffic in the quarter than we did, but advertising is not just what we spend on TV but also our strategy around the internet, around paid searches and our listing, where we list our cars, with Cars.com and Autotrader.com and other listing agents.

So its been very dynamic over the last several years as we've shifted lots of dollars towards the internet, and we believe we're making a solid investment in advertising.

We're building our brand, and we believe over the long run, advertising, obviously all that we're spending will pay off.

Thanks, I'll get back in the queue.

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

So the question on expenses, if you look here in Q1, expense growth was roughly muted, given the accelerating unit expansion you're experiencing.

So the question I have, should we expect expense growth to pick up as we move through 2012 here, as the unit growth picks up further as well?

Well, a lot of it is going to be driven, Brian, by whether or not we get stronger comp sales.

I mean, unless you're just referring to gross expenses, the majority of the difference year-over-year is related to new store growth.

So if I'm looking just at that piece, how should we think about the cadence of that, that component of your expense through 2012?

In other words, so you open two stores here in Q1.

If you open a larger number, will there be higher expenses then associated with that?

Well of course there's going to be higher expenses with more openings.

When you look at it on a year-over-year basis we opened up five last year, we'll open 10 this year, but we're also prepping for between 10 and 15 the following year, so yes, you're going to see some more expenses as it relates to growth.

We haven't guided around that specifically by the quarter, but you would expect to spend more money in a year when you're building more stores.

Brian if you look at this quarter year-over-year we're up about $12 million.

And about $10 million of that is due to the SG&A and new stores and all the things that go around supporting our growth initiatives.

Things like pre-opening, relocation and et cetera.

So the lion's share of that increase is due to new locations, obviously as we grow comps as well, sales commissions will go up and you'll see SG&A climb from that perspective too.

Got it.

And then a quick follow-up.

On sub-prime, it was another decent driver of your sales here in Q1.

I know you addressed to some extent in your prepared remarks, but the question I have, we saw a strong sub-prime business in the fourth quarter.

I think you'd commented or we talked about some of that was driven by kind of a seasonal strong business, but here it persisted into Q1.

Is there something shifting with that sub-prime business that we'll see it amount to a bigger contributor of our business throughout the year?

I think as we've talked about it, there has been a shift in the behavior of our third-party lenders who have begun giving more attractive offers to our customers, because they have become more comfortable with the CarMax origination channel, they've seen better performance in their portfolio, and they are willing to go out there and give our customers more attractive offers.

What we saw, if you look at fourth quarter versus first quarter this year, as I mentioned, coming out of the fourth quarter last year, we did see a step up in their activity, and that continued into the first quarter.

And if you take a look back at fiscal year 2010 and fiscal year 2011, what we saw was about a 1 point drop in Q4 versus Q1 sub-prime penetration, and this year it was relatively flat.

So we did see a step up in their activity and it continued into the first quarter.

As far as going forward that's going to depend on our partners' experience, but at this point we have no reason to believe that there's any reason it should change.

And the only thing I'd add there, Brian is you know how our credit flows and the customers who qualify with these providers have gone through every other credit channel in our store, and at that moment, they are about to leave without buying a car.

So we're pretty convinced this is almost 100% incremental business, and because of the fact that we subsidize it, and because of the fact that customers have access to any piece of inventory at CarMax, I think we're giving these folks a fantastic deal.

And if our lenders continue to get more comfortable with the experience they have with this origination source, then it's fine with us if they continue to offer more credit to our customers.

Thank you.

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

I wanted to talk through a couple of the things that are perhaps within your own jurisdiction.

So, obviously comps are composed of traffic and conversion, and so can you walk us through maybe any initiatives or thought processes on improving one or the other?

And I'm also curious as to whether or not you're seeing your web traffic decelerate, because I'm wondering essentially if consumers are kind of opting out of the traffic, because they are not happy with the inventory or the pricing or something like that?

So I'll first talk about overall traffic and conversion, and the things that we're doing to try to improve both.

We're constantly tweaking our advertising program and trying to figure out what the right mix is of spending on TV, and spending on the internet, and spending in radio.

We have tried to manage that, along with units sold, so that we're not overspending related to the number of cars that we're selling.

With flat comps, we're going to manage that down a little bit.

If comps went up we would probably spend a little bit more.

But in terms of the mix of advertising I feel we're pretty comfortable with it.

We have a new ad agency, new in the last year or so.

We just came out with a brand new set of a new campaign called Start At CarMax, we're very pleased with how that came out.

I think with any advertising program, like that you're going to see the results over a longer period of time.

Not so much on a short period of time.

In terms of execution in the stores, pretty much everything we're working on is to try to improve our conversion.

When we're trying to take cost out of reconditioning, that's to improve our conversion and improve the offer to the consumer and improve quality.

We've talked lots about improved training programs in the stores and training and development for not just our sales consultants, but our sales managers as well in our stores.

We've upgraded our on-boarding process and when we bring a new sales consultant on board, we're providing much more of an extensive training program than we have in the past, because at the end of the day it's still a sales job.

You still have to build rapport with the customer, you still have overcome objections.

I feel like we're making some good progress there.

I mentioned in my opening remarks that our traffic was down slightly, when you subtract out appraisals.

We've said that appraisal-only volume has really spiked and you've seen it in our numbers, particularly in wholesale over the last couple of years.

And so for the first quarter if you took that out, despite the fact that traffic was down slightly, our conversion would have been up slightly.

But there is no one thing, no one button you can push to change conversion.

I think it's something we'll be working on for as long as we're in business.

And the last question you asked was about web traffic.

I'll let Tom give you the update there.

Yes, web traffic continues to be up year-over-year, in comp markets it's up in the middle to lower teens.

Is that consistent with the trends you were seeing in web traffic throughout last year, or is it decelerating?

I wouldn't, it's consistent with last year.

There's no difference.

Yes, we've continued to see growth in web traffic throughout.

Okay, thank you.

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

A question about wholesale.

And I understand that the difficult comparisons, I understand that the calendar shift, all that makes sense to me.

But two questions I guess.

One, why would you have a lower buy rate, given the way you run that program, and two, are we at the point where you would expect wholesale units to roughly track used retail units?

Well first, the difficult comparison is worth re-mentioning because going up 52% and then 32% means that our volume of wholesale doubled in two years in the same quarter, and we were able to deliver that same volume.

The lack of a Tuesday is significant.

It's a couple of percentage points, and we think we would have been flat, had we had that extra Tuesday.

I have no idea if we're at a point where they will track.

They happened to track this quarter.

We've said all along we thought that both the margin was somewhat unsustainable, and that the growth that we've seen in wholesale, we didn't expect to continue.

And we have said that we believe, over time, that they will, in general, move together, and I still believe that.

I wouldn't take this quarter and say, because they pretty much exactly matched up, that we're going to see that going forward.

There's too many other variables involved.

And the other question you asked on buy rate.

Remember, we could have bought at 40% if we wanted, but our margins would have dropped a whole bunch, because the only way you can do that is make higher offers, and since we don't know which ones we were or weren't going to buy, we would have to make higher offers across-the-board, so if we raised all of our offers by $500, I'm sure our buy rate would have been significantly better, but our margin would have been also much lower.

So it's always a balancing act.

There's probably no, we're always trying to optimize it but there's probably no exact right answer to that question.

So what was the buy rate this quarter then and what did that compare to?

It's only down slightly.

I mean, we've been running around 30% and we were down, I think, 0.5 points or 1 point, so it's not like it's a big number.

Got it, okay.

Thanks a lot.

Your next question comes from the line of Matthew Fassler of Goldman Sachs.

Kind of a two-part question.

Sharon asked you about some of the controllables related to traffic, among other things.

Just if you could talk a bit to the diagnostics of why you think traffic in particular is under pressure, and whether you think the supply issue is something that shows up on the traffic side, or if it typically shows up in conversion?

Is it a function of people looking for a kind of car and not finding it?

Is that supply dynamic kind of spreading, if you will, into traffic?

And then a second part of the question, if you will, this is the third or fourth quarter in a row where your ASPs have outperformed the Manheim Index for the comparable period, so you're up more than the index, which is now under pressure.

I'm sure there could be lots of reasons for that, related to mix, but if you could shed some light on your pricing trends versus the market, it would be great, thank you.

That was a long question, Matt.

Sorry, Tom.

First one on traffic, we don't get too wrapped up in one quarter of traffic being slightly down.

I talked earlier about advertising being a long journey, and we have continued to spend, and we've continued to invest in both our TV and our radio and our internet advertising, and search engine advertising, and continuing to develop our website.

And another driver of traffic is just continuing to give a great experience to the customer when they walk in the door.

Still, our biggest source of customers, when we ask, comes from word of mouth, and we think our stores are doing a great job there.

So we think we're doing all the right stuff.

I think you asked about supply being a traffic driver.

Yes, I think it has some impact.

If historically our sweet spot has been more in the one to three-year-old cars, there are a lot less of those cars out there available.

I talked about the fact that the lack of supply has driven our prices up, and you mentioned that in part two of your question.

Our margins really haven't moved that much.

If you look at it, $100 or $200 whereas our average retail, if you go back to November of 2008 has gone up about $3,000, and that's a direct result of the lack of supply.

So yes, I think it has some effect.

I think some consumers look at pricing and just decide to not get out there and buy right now.

And I think until we see some movement in the supply and the SAR get back up to historical levels, then we're probably going to be looking at this for a little while.

And as you think about your pricing versus the market, is your relationship to the market pretty much where its been?

Yes, I hadn't seen that, and we don't compare to that, so I couldn't give you an answer on why we're different than the index, and I don't know if their index is over a broader set of inventory compared to what our index is.

Sure, understood.

Thank you very much.

Your next question comes from the line of James Albertine of Stifel Nicolaus.

Very quickly, just wanted to touch on the new store productivity.

You called out some interesting details in the prepared remarks, but considering the lack of the late-model supply and if you look at new store productivity over time, its actually been improving.

Is there something that's changed from the cost standpoint?

So I'd seen an analysis that goes way back to 2003, so maybe asking if you can provide an updated sort of look at what the new store investment sort of budget is going forward, and how it's changed pre and post-recession.

Yes, it hasn't really changed that much in total again because there's lots of different variables in there.

If you go back to pre-recession and what we would spend on a combination of the land and building, those numbers really haven't moved dramatically when you size the land and the building and match it out to what we were doing before.

So for the same size building, similar piece of land and a similar-priced market, our prices will be -- the cost of building a store is pretty close.

What has changed is our profitability as a Company and profitability per car sold, so the sales hurdle required to deliver a good return is lower than it used to be.

And when I talked about our new stores performing slightly above their sales expectation, obviously when we decide on an investment and we build a store, we expect it to sell a certain amount of cars, and then deliver the right amount of profitability to deliver a return, and the point we were making in the prepared remarks was that we have restarted growth, going back three years ago.

We opened the three stores that were already sitting there and built, Cincinnati, Dayton and Augusta, we opened five stores last year and three stores this year, so that's 11 stores we've opened since coming out of the recession, and just as a group, they are slightly above our sales expectations, which obviously, our sales expectations are built around what we need to sell to deliver a return.

Very helpful.

Thanks so much.

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

Latching on to an earlier question I think Brian asked regarding sub-prime.

If comps were flat, but the sub-prime penetration went way up, trying to figure out what that means for what's happening at the prime or semi-prime levels as far as volume growth and then if there's anything to diagnose about the consumer in that segment?

I think as you kind of articulated the math is pretty straightforward.

And as I mentioned in the prepared remarks, we are seeing credit quality a little bit down through the door, and our Tier 1 approval rate, meaning cap is a bit down from last year, so sub-prime is picking up the slack, and so we are seeing some pressure there.

But we're still delivering, when a customer walks through the door, more than 85% of our customers are having access to credit, and that's across-the-board Tier 1, Tier 2, Tier 3. As I mentioned earlier, we're very proud of what we're able to do for the sub-prime customer.

I think that nowhere do you get a better deal than you do at CarMax, if you happen to fall in that credit profile, and obviously, we would like to do better with Tier 1 and Tier 2. I talked about a lot of the factors around why we think sales were a little slow for the quarter or flat for the quarter, and I think those variables are still there.

We need to see the economy pick up.

We need to see unemployment move down, and we need to see more movement in the SAR, and it's going to take some time.

Okay, thank you.

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

Good morning, it's Dan Galves in for Rod.

I just wanted to ask about the used retail margin per unit.

It came down throughout fiscal 2012 each quarter and then jumped back up to basically year-ago levels in this quarter.

What do you attribute that growth back to last year's levels?

And then second question on CAF.

The net interest margin seemed to decline a bit in the previous quarter, back up this quarter to pretty high levels.

Again, how do you account for that, and what are you seeing in the current securitization market in terms of the cost of funding?

I'll talk about margins and Tom can talk about the interest margin question, but our margins have been relatively consistent.

Sometimes you'll look at our margins and they will be down $20, and I've said all along, we can't manage margins that closely.

So if we're within $20 or $50 it's pretty flat, and this quarter was for us pretty flat to last year, and first quarter is historically a pretty strong margin quarter for us.

So we didn't really look at the year and say that and feel like our margins had been declining throughout the year.

They've been pretty close.

So there's some seasonality there?

There's always been a little seasonality around margin.

Okay, thank you.

And Tom will talk about net interest.

Yes, I can talk to the net interest margin, Tom.

And remember, the interest margin is a combination of the APR, our funding cost, and market influences, which drive kind of both of those, and we don't control the funding cost and APR, we're going to do what the market takes.

As we mentioned, we have been taking back volume that we used to pass off to our third-party lenders, and that volume is of lower credit quality and thus at higher APR, so that factor there, you'd see some impact in rising APRs over time, because it's going to take a while to go through the system.

But at the same time, we've been aggressive in making sure that we're providing good offers to our high FICO, high credit customers, so there's some offsetting factors going on there.

As far as the securitization market, I said we priced a deal a couple weeks ago.

It went as good as can be, probably stronger than the past deal.

The cost of funding is probably 5 basis points tighter, with a typical weighted average spread on the deal, so the average coupon on the bond is about 1.03%, something like that.

So still very strong.

Still seems like there's a lot of access to the market.

We went out at $750 million deal and ended up pricing a $940 million deal with tighter spreads.

Okay, got you, and there's no help you can really give us on kind of net interest margin going forward, whether it's up from this quarter's level or down, just tough to call?

It is tough to call, because as I said, there's a lot of moving pieces and we're just going to try to optimize what's best for CarMax over the long run.

Okay, thanks very much.

Your next question comes from the line of Clint Fendley of Davenport.

A question on the wholesale.

Wondering, for the 10 new stores that you're planning to open this year, how many you would anticipate would be wholesale sites, and I'm wondering if a new store also serves as a wholesale site, what is the typical timing for when you would begin running the auctions after a store opening and just any incremental costs involved in that?

Yes, I don't know off the top of my head, of the 10 that we're opening how many will have auctions in them.

We don't run auctions at any of our satellite stores, so if you look at the mix of stores for the year, you can just take out the satellites.

In terms of the ones that will run auctions, when we're looking at going into a new market, we factor in wholesale as one of the factors that we use to determine how much land we need to buy, how big a building we need to buy, so it's all built into the economics.

When we talk about our CapEx plan for a year, we're factoring in what our wholesale capacity needs are, when we're going and building new stores, and we only run auctions at about 55% to 60% of the locations that we have, and we ship the other cars from say a satellite store to a hub store.

In terms of when does a new store start running an auction, it all depends on its volume, all depends on how quickly they buy wholesale cars.

Oftentimes, we'll start an auction in a new location by running once a month, and then as the volume picks up, we'll go to every other week and then ultimately get to weekly in the sales, so we're pretty analytical about it.

We're well-aware of what the shipping costs are to move from one to another, and we also don't want to let cars sit around for too long, so there is no exact answer.

It's very much dependent on volume, but as I said, as we're building these stores, the fact that we run an auction and that we need acreage to have these cars is factored into our decision-making.

Okay, got it.

Thank you.

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

It's Josh on for Matt.

As we look at the stores that you are going to be rolling out for the next 12 months, can you give us any color on what store of the future feature is going to be carried out to those, and which stores will have them, or how many will have them?

Yes, I think the next set of stores that will be what we call next gen, one will be in Des Moines, and two in Denver.

We have Fort Myers and Naples also coming this summer.

Those did not get the package because of the long build time and but a couple of important things to note.

A lot of the things that we hoped to be able to learn we think are transferable back into the existing chain, without spending a whole bunch of capital.

So there's some technology advancements in the stores, and some of those things are pretty modular and can be put back, but there's a lot of different customer service things.

We've separated out the appraisal area completely.

We can roll that back into the stores without a bunch of capital.

Simple things like we allow customers to test drive cars on their own, which we just have not done to this point.

That's obviously easy to do in all of our stores.

All of our cars are unlocked.

Customers have access to browse the lot and go in and out of cars.

For security reasons and for making sure they have a sales consultant with them, we haven't done that before.

That's also pretty modular and can be rolled back.

Our sales consultants and sales managers are using iPads to try and help with delivering a better customer experience.

That's another thing, obviously we can put back into existing stores without a bunch of capital, so it's awfully early.

We only have one store open.

We're pleased thus far with the results and with what we're learning, but in terms of how quickly will we get into the rest of the chain, it's still a little bit too early.

Okay, thank you very much.

Your next question comes from the line of Rick Nelson of Stephens.

I'd like to ask you about the self-sufficiency rate.

What happened in the quarter, and compared to the prior year?

Rick we don't have that one handy.

While they are looking for the numbers, I would guess it's relatively flat, since sales were flat and our buy rate was relatively flat.

And while the number is coming, if I could ask, I know you like to talk about market share on an annual basis, but any commentary as to what you think happened in the latest quarter, maybe in the various buckets, the one to three year old cars, the five-plus cars?

Yes, Rick, just because of the historical volatility around market share numbers, we'll only talk about it annually, so we gave our share numbers at the end of the year, and we'll give another update at the end of the year.

Self-sufficiency was up slightly for the quarter.

Okay, thanks a lot.

Your next question comes from the line of Bill Armstrong of CL.

King & Associates.

Just to touch on an earlier question a little bit.

Obviously, we have seen recent indications, various indications that used car prices are softening a little bit.

To what extent are you seeing that, and in your view, do you think that's sustainable?

Well, I think our prices were relatively flat, in terms of our total ASP year-over-year, so--

In terms of wholesale price, the price that you've got, that you're seeing in the market?

No, in terms of, I'm saying our average retails were relatively flat and you're asking about--

Right, I mean--

Wholesale and retailing them so it's a result of that.

And I have seen some softening largely in the last couple of years.

Particularly at this time of the year we've seen pretty big appreciation in the wholesale market, and we're not seeing that as much as we had in the past, but if you backed out pre-recession, what we would normally see coming out of the Spring is a pretty steady depreciation throughout the second half of the year, which is obviously going to have an impact on pricing.

And we don't know if that's going to happen this year, but that would be what we would consider more of a normal curve of how pricing should flow.

That's also driven by how many new cars are sold and how many new cars are sold each month.

And although SAR has been moving pretty steadily, it was down in May compared to what it was in April.

If I think if we see a steady climb in the SAR throughout the next couple of years, then we may get back to what we would consider more of a normal depreciation curve.

Got it.

Do you think that the what looks like will be an increase in off-lease vehicles entering the wholesale market beginning next year, do you think that will have an appreciable impact on supply and on your vehicle cost?

The supply, total supply is going to be driven by total SAR, not the percentage of new cars that are leased.

If there's a bigger percentage of new cars that are leased, it makes our ability to acquire that inventory is a little bit easier, because the cars are more organized.

They come back through lease companies and they show up at auction pretty consistently, but in terms of the total supply, the percentage of cars that are leased over the long haul really doesn't have any impact.

It changes the timing a little bit.

It changes where we have to go buy the cars.

So again, I don't think pricing is going to be driven by the percentage of cars that are leased.

I think it's going to be driven by the total number of new cars sold in the US.

Right, and are you seeing any impact that you're able to quantify at all on new car dealers holding on to a greater percentage of their trade-ins and re-retailing them rather than putting them out in the auctions?

No.

I mean, we haven't seen an impact in terms of our sourcing ability and what we've heard from lots of the new car dealers is that they are actually keeping older stuff, older stuff that they historically would have wholesaled, a lot of that stuff does not meet our retail standards, and that would fall into our wholesale area, which as you've seen, has grown substantially over the last couple of years.

So what we've seen and what we've heard in terms of behavior from other dealers about keeping stuff and selling stuff at retail, it feels like its been more driven by selling stuff that they normally would have wholesaled.

Got it.

Okay, thank you.

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

Just one here and that is you sort of mentioned earlier that sub-prime lenders were getting more comfortable with CarMax's origination channel.

I was just wondering if you could sort of describe what they were less comfortable with prior, and why that's waning?

Thank you.

Well I think what they've seen is the performance of their portfolio is the biggest evidence that you can give and they've told us, both our sub-prime and Tier 2 lenders told us a similar set of assets generated out of CarMax performs better than one generated elsewhere.

And if you think about what are the risks to an auto lender, it's the collateral, and it's the information you're getting about the customer, and our business model provides a very elegant origination channel in that we know what the collateral is worth because we bought it, so there's no obscuring of that.

It's very clear and we have transparent process so that the information about the customer is very solid.

So when the lenders start looking at the risks they have embedded in the auto lending practice, they don't have to factor anything in for perhaps a disconnect on what the value of the asset is, or the information from the customer.

And we bring all our cars up to the same quality standard.

It doesn't matter what tier a customer buys in, whether they're Tier 1, Tier 2, Tier 3, sub-prime.

The quality standards all the same, and that's another thing we've heard loud and clear from our providers, is that the quality of car that we sell, you're more likely to pay if your car is still running.

Thanks so much.

Okay, seeing no further questions, I want to thank everyone for your support and your interest.

And of course, thanks to all of our associates once again for your dedication and hard work, and all you do every day.

And we'll talk to you next quarter, thanks.

This concludes today's conference call.

You may now disconnect.