車美仕 (KMX) 2014 Q3 法說會逐字稿

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

At this time I would like to welcome everyone to the Q3 FY 2014 conference call.

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

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

(Operator Instructions).

Thank you.

Ms. Katharine Kenny, you may begin your conference.

Good morning, happy holidays.

Thank you for joining our fiscal 2014 third-quarter earnings conference call.

I have with me today Tom Folliard, our President and Chief Executive Officer, and Tom Reedy, our Executive Vice President and CFO.

Before we begin, I need to 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 protections 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, 2013, which is filed with the SEC.

Before I turn the call over to Tom, I would like to remind all of you that our next regular analyst day takes place on January 21.

If you are interested in attending please let us know.

Tom?

Thank you, Katharine.

Good morning, everyone.

Thanks for joining us today.

Used unit comps for the third quarter were up 10% compared to last year despite the toughest comparison of the year primarily due to better conversion as well as a modest increase in traffic.

Total used unit sales grew by 15% in the quarter.

Used vehicle gross profit grew by 16% and used vehicle gross profit per unit of $2149 was generally flat compared to last year.

Wholesale unit sales, up 4% due to the growth in our store base.

Our wholesale gross profit was similar to the prior year as the 4% growth in units was offset by a decrease of $36 in gross profit per unit.

Extended service plan revenues were also similar to the prior year as the reserve adjustment related to the increases in cancellations offset the effect of our sales growth.

CAF quarterly income increased 16% to $84 million.

The bottom line is we are pleased with another strong quarter; net earnings grew 12% to $106.5 million and net earnings per diluted share rose 15% to $0.47 per share.

I will now turn the call over to Tom Reedy to talk about financing.

Tom?

Thanks, Tom.

Good morning, everybody.

In the third quarter CAF income grew 16% compared to the third quarter of FY13.

Average managed receivables increased 24% to $6.8 billion and portfolio growth continued to be largely driven by strong origination volume.

Similar to the first half of the year, managed receivables grew at a faster pace than CAF earnings as the increase in loan volume was offset by compression and spread versus last year's third quarter.

Weighted average contract rate per accounts originated during the quarter was 7% compared to 7.7% in last year's third quarter but up slightly from the 6.8% we saw in Q2 of this year.

The allowance for loan losses increased to $68 million and at 1% was flat as a percentage of managed receivables.

Credit losses in the quarter were moderately better than our expectations.

For CAF, net loans originated in the quarter rose 12% to $961 million and net penetration was 41% for both this and the prior year's third quarter.

Third-party subprime providers accounted for about 18% of our sales in the third quarter compared to 15% in last year's third quarter.

As you know, we had experienced an increase in subprime volume over the last couple of years as third-party providers have made more attractive offers to customers.

Late in the quarter we began to see them tighten the credit offers that they had been providing.

Finally, we plan to launch a test during the quarter to actively learn more about originating and servicing customers who would typically be financed by our subprime providers, an initiative we've been working on for over a year.

Our objective at this point is to gain familiarity with the customer segment and to determine if it is appropriate for CAF to participate as one of the lenders in this space.

Beginning in the fourth quarter, we plan to route a small percentage of these applications to CAF and would expect to originate approximately $70 million over the course of the next year.

This represents less than 2% of what CAF originated from -- in the last 12 months and we plan to fund this test separately from our securitization vehicles.

Tom?

Thank you.

Regarding our sales mix, there were very few changes of note.

Similar to the second quarter, sales of compacts and midsized vehicles grew a few percentage points.

As we've discussed before our mix of vehicles will vary based on customer demand.

Total SG&A for the quarter increased by 11% reflecting the 12% growth in our store base since the beginning of last year's third quarter and variable expenses related to higher sales.

SG&A per retail unit was down $98 again largely driven by the 10% comps.

In the third quarter, our average monthly Web visits neared 12 million hits per month, up 36% compared to last year's third quarter.

This quarter was the first during which more than 50% of our traffic came from devices other than desktops or laptops.

Average monthly visits to our mobile site represented about 26% of total visits and visits utilizing our iPhone or Android app represented nearly 12% of our traffic.

Also during the third quarter we opened three stores, one in Jackson, Tennessee, one in Brandywine, Maryland and one in St.

Louis.

And after the third quarter ended, we also opened our second store in St.

Louis and two stores in our Philadelphia market including our King of Prussia store which will open today.

We announced four planned openings for next year's third quarter; three are in new markets for CarMax including Portland, Oregon, Tupelo, Mississippi and Reno Nevada.

We will also open our third store in the Raleigh market.

And with that, we will be happy to take your questions.

Operator?

(Operator Instructions).

Simeon Gutman.

So I have one and a follow-up.

The first might have a couple of parts to it.

On the finance side regarding the subprime tightening, can you talk to -- is that the number of offers being made is going down or is it the same number with higher rates?

And can you discuss what is sparking the change and if you are seeing any other changes in the actions of other lenders?

I will take that, Simeon.

As far as what tightening means, it really means they are going backward on the changes that they have made over the past couple of years, which is down payment and kind of ease of documentation that we have seen them slide back a little bit on that.

As far as where it lands we don't know, it is too early to tell and what that means.

And as far as why they are doing it, they run their own portfolios just like CAF does.

They are managing to optimize profitability and size as well.

I can't speak for them but I guess I would guess that they are taking moves to manage risk based on what they've been seeing over the past couple of years.

I do not believe that it is a CarMax specific issue though.

And then the other lenders at the other part of I guess the portfolio not the non-cap stuff some of your other lenders, are you seeing any changes there?

Actually this quarter has been a little bit positive vis-a-vis where they have been historically.

Okay.

And then the one follow-up is in testing your own portfolio, is that something that was discussed with your current partners and might you expect a change in the fee you pay as a result of that test?

No, this is something that we have made them aware of.

In fact, we have been working with them over the past year trying to do due diligence and get smarter about working in this space.

So it is not a surprise for them and the nice thing about being back in growth mode again is that we can grow the portfolio and allow partners to continue to grow and bring new people in like ourselves if that's what makes sense.

Okay, thank you.

Matt Nemer.

Just a follow-up on subprime.

I am curious if your in-house auctions and the ability to sort of dispose of vehicles quickly and probably cheaper than other subprime players could potentially allow you to have a better offer in the marketplace?

You know, Matt, we dispose of lots of our current repos through our auction channel.

So I think it is just another -- another thing that we do that makes it easy for us to run a finance business or easier to run a finance business since we don't have to rely heavily on outside parties to dispose of repos.

So it is a factor but I don't think it is a big one.

And, Matt, I would also point out, we are not -- in the event that we go through this test and we determine it is the right thing to do for us, our goals are not going to be to out-compete other people in the subprime space.

We are looking at it as potential profit and risk mitigation in our business.

Okay, great.

And then on the warranty business, I am curious just why the cancel rate has ticked higher?

It seems like at $10 a month on a $200 or $300 payment, it is not something that you would really pay a lot of attention to.

Yes, Matt, we are not going to be able to go in any granularity on what is driving the cancel rate but we have observed a higher rate of cancellations on the ESP we have originated over recent years.

And as a reminder that product is cancelable any time during its life and we have to return a pro rata amount in the event the customer cancels.

They could cancel it at will, they could be canceling it because they are buying a new car, because they got repoed -- for any number of reasons.

So as we sell that product, we book a reserve and it is an estimate just like it would be on CAF loan losses that we have to tune on a periodic basis.

If you remember we had a $0.01 adjustment in the fourth quarter.

The portfolio has gotten a lot bigger; we have actually sold over $700 million of the product since 2010.

And we have seen the movement so it was appropriate to adjust the reserve amount here.

I guess do you think that is a -- should we view that as more of a macro consumer issue or is it -- does it have something to do with you think with your offer?

Like I said, we can't go into that kind of granularity.

What I would view it as from your perspective is very slight worsening in the profitability of ESP because we have a different view on what is going to be returned on a go forward basis.

And if we see different behavior going forward, we will change it again.

But it amounts to a small adjustment in the go forward reserve in a minimal maybe 1% less profitable on the ESP that we sell.

So it is a few bucks a car.

And then just lastly, the stats on the Web visits in the mobile usage are pretty strong.

What does that mean for your business model?

I mean are those customers more likely to convert?

Are they more likely to refer you to a friend?

Have you kind of thought through what that could mean from a financial standpoint longer-term?

Yes, it is a little hard to say.

But I just clearly think this is where consumers are going and they are spending a lot more time on the Web prior to coming to the store and we've seen that trend for several years.

So it is not surprising that the growth of Web traffic dramatically exceeds the growth of foot traffic.

I think people are showing up more prepared.

So I think it has lots of ramifications for the business but it is really difficult to figure out what that is right now.

But in general I think it is positive.

I think we have a great app and I think we have a great website and a great search engine and I think we're providing tools that customers want so that they are better prepared to make a decision.

Next question.

John Murphy.

Hey, guys, it's John Murphy.

Can you hear me?

Yes.

Just to follow up on the CAF question here on the subprime side.

What is the motivating factor there?

Is that really just to grow CAF earnings which is a good thing or is that an all response to this pullback in credit availability that you are seeing from your subprime partners?

And also what was the highest that subprime was as a percentage of sales at the peak?

Yes, John.

As I mentioned, we have worked on this for over a year so it is not a reactionary move at all.

Customers with challenged credit have become a meaningful part of our overall business and they are a meaningful part of the used car market so we feel like we owe it ourselves to get smarter about this space.

Whether we are in it or not with our partners we need to understand it a little better.

We have considered a number of options including a joint venture or something like that but we determined this is the best way to learn.

So that is probably the best way to address what (multiple speakers).

Yes, I mean, John, when this was 3% or 4% of our business it wasn't as big of a discussion point but when it is 15% plus, we have to look at what is in the overall best interest of the Company.

So this is just a step in that direction to really learn more about the segment.

All right.

It seems like it makes a lot of sense but what was the peak percentage I mean 18 kind of (multiple speakers)?

21.

It was 21%.

21, okay, great.

Then just a second question on vehicle pricing up $125.

Tom, was that just -- is that just a function of mix?

Because there is always this expectation or this expectation in the market that used vehicle pricing might come down but that doesn't seem to be happening at all.

John, I missed the beginning part of that.

What did you say, used vehicle pricing?

Your revenue per unit was up $125 year over year and it is a pretty strong number.

I was just curious what you are seeing for used vehicle pricing?

Is that mix or -- because there's an expectation that used vehicle pricing will come down and that is just not happening.

You know, I have never seen it come down other than the recession when it dropped a couple thousand bucks in less than six months.

So I mean we don't view $100 as a very big number on an over $19,000 average retail, so we didn't really spend any time looking or talking about that.

Okay.

And then just lastly, [venture] general managers for new stores, where are you on that process?

We feel like we are in really good shape.

Our opening plan as we have announced 10 to 15 stores over the next three years, this is the first of those three.

As the percentage of the base of stores that we have, it is actually a smaller percentage than what we have grown in the past and I think we've done a really nice job over the last few years of building up our pipeline both in terms of real estate availability, people availability, getting folks trained and ready to go and having people prep to move to new markets.

So I feel like we are in really good shape.

Great, thanks a lot.

Happy holidays, guys.

Matt Fassler.

I would like to dig a little bit deeper into subprime as well and just get a better understanding from you as to sort of the operational differences managing a subprime business from running CAF as it exists today.

And also if you could give us some sense as to the sources of funding as you launch your pilot and then if it is successful, whether you would anticipate funding subprime through the ABS market or through some other vehicle?

Thank you.

Sure.

Hey, Matt.

So I'm not going to go into a lot of detail about what we are doing as far as managing service but our game plan is to randomly route a small percentage of customers to CAF and run them through the scoring model that we have developed and provide great customer friendly service.

One thing I think is important to remember, we've got a great team in Atlanta that runs a great finance business and we already serve a pretty wide spectrum of credit.

Some customers need more attention than the others as far as calls, etc.

We are viewing this as an expansion really of what we already do.

Like I said, without getting into details, we have built upon our account servicing techniques.

And I think it will be appropriate -- it will be helpful for this space but I think we will also learn some things and have some benefit in the business we do today from it.

As far as funding, at this point we are just going to use cash on hand to fund the test.

It is very small.

To the extent we decide to go forward with this as a line of business or an initiative, we will explore other options and we would plan on trying to do something to the extent it is available whether it is in the ABS market, conduits, that will be -- we will determine that as we see fit.

And then just a quick follow-up, this goes back to core used vehicle sales.

Obviously the supply of newer vehicles coming off lease seems to be starting to gush and is plentiful relative to where it had been in recent years.

Are you seeing that flow through to your buying -- to your buying opportunities?

What is your sense of whether that is actually materializing the way the numbers say it is and what that does for your -- for your sourcing and volume potential going forward?

Yes, I think the gush you are talking about in leasing is lease percentage of new cars sold and that is really a lot more recent so those cars really have not started coming back in any big numbers.

So as we talked about last quarter, our mix shift between zero to four-year-old and five- to 10-year-old really hasn't moved very much.

But clearly if the SAR stays -- continues to move up in the 16 million plus range and the percentage of leased vehicles is higher, then ultimately those cars will come back at the auction.

It really hasn't started to happen yet but we expect it to and I think that is good for us.

Thank you, guys.

Sharon Zackfia.

So a couple of questions on CarMax Auto Finance and then I had a question for Tom as well.

So on the tightening of credit, it didn't look like based on the percent of subprime sales in the quarter that it had any kind of noticeable impact.

So has it been more of an impact as you have gone into the fourth quarter?

Was it near the very end of the third quarter?

Yes.

I think as we mentioned in the release late in the quarter we saw a change in behavior.

And every call the last two or three calls I have been asked whether we see any reason to think that our partner's behavior may be different than it has been.

And this time we do.

So that is why we are talking about it.

Okay.

And I mean are the loans that you are going to generate through CAF, are they expected to be a substitute of the loans that you would've generated through the third-party lender so kind of cannibalizing the third party?

Or is it a significantly different scorecard than your third-party lenders use so it would be additive -- if I am making sense there?

It is our own scorecard but we plan on routing to CAF just like we route to our other third-party lenders.

So it would eat into a little bit into what they are doing.

Okay.

And then --.

We're not going into this, Sharon, thinking we are going to add a bunch of incremental sales because our third-party providers are missing the boat in this arena.

It has just become such a big percentage we don't want to have so little visibility into this area particularly one that is so costly for us.

Right.

It is important to remember that the sales through these partners are about a third as profitable as something that goes through the -- either the CAF or one of our other channels.

Right.

So there is a big economic (multiple speakers)

Yes, there is quite a lot of incentive there.

And I assume if this is a good pilot program and you expand it further sometime in the future you wouldn't indefinitely fund this through your own balance sheet, right?

No, as I said to Matt, I think we would look at alternatives to fund this and as I also mentioned, we are looking at this as a play for profit potentially and risk mitigation and at this point if this test makes sense, we would envision us being one of several partners in that space not trying to grab all of the share.

Okay.

And then just a quick question on marketing.

I mean that year to date marketing spend is pretty flat, which I think is relatively unusual.

And I was hoping somebody could speak to whether that is just more efficiencies you are getting in the marketing team or in the buys that you have if your impressions are actually up year over year, if those are flattish.

Just any indication on what is going on with marketing because I am just surprised that it is not up more.

Well, we have pretty good comps for the first nine months of the year, so that hopefully is going to drive some leverage.

And we do have some timing, we will spend a little more in the second half of the year, we are planning on running a Super Bowl ad this year.

It is a few million dollars, it is not dramatic but there will be a little bit of timing into the fourth quarter.

But we expect the business to leverage in a number of different areas and if we are running -- we were 16, 17 and 10 in comps for the first three quarters.

So --.

It was actually flat in dollars though.

I mean I was just looking at it in dollars not as a percent of sales.

Yes.

And we think of it as dollars per car sold.

So when I say leverage, I'm talking about in dollars per car sold.

Okay.

You are going to force me to watch the Super Bowl, that is the master plan.

Yes.

All right, thanks a lot.

Brian Nagel, Oppenheimer.

Congrats on a nice quarter.

So I too want to ask a question about subprime.

Is there any way to quantify the impact here upon your sales of these actions that the lenders have taken here recently?

In other words, how should we think about how much that is either in the current quarter or going forward, how much could this weigh upon your used car sales?

I mean we aren't very good at predicting the future for any part of our business, which is why we don't give guidance.

And I think it is just too early to tell.

We don't know where they are going to land as far as where they dial in at, how much they're going to tighten.

So we can't give you any guidance going forward.

But like I said it is -- we have observed a change.

We get asked this question every quarter and we know it is important to let you know.

And there is way too many other variables when you think about like the question Matt asked about supply and customer traffic and the growth in our Web traffic, there is just a lot of things -- a lot of moving parts there.

So it is very difficult to predict.

Got it.

And the follow-up question, someone previously asked about the performance of your new stores, I just wonder if you could clarify -- maybe given that you are opening so many new stores, how would you characterize overall performance of the stores?

Yes, as a group, all of our -- the new stores are at or above our expectations.

So we are very pleased with how openings have been going and it is a pretty diverse set of stores too, spread out across the country and that will be the case going forward as well.

So what we are really focused on is continuing to improve our business model each and every day and make sure that when we open a store we have experienced CarMax team in place so when a customer walks in the door they get a great experience and we have been very pleased with how that has gone so far.

Then one more follow-up if I could just jumping back on subprime.

Again, so I think someone else asked, is there any way you can tell the reason behind the change in behavior of your partners?

The question -- have seen anything to suggest that the performance of these subprime loans is actually deteriorating?

We don't participate in the space so I can't really comment on that.

But I think I would hypothesize that they have not been as happy with what they have seen, that they've originated over the last two years and they are adjusting their portfolio accordingly.

Look, a number of times over the last several quarters we have said that our subprime providers have gotten more and more comfortable and more and more aggressive with the CarMax origination channel.

It just makes sense that at some point you would bump up against some performance metric and probably have to scale back a little bit.

But again, we don't run their business, they run their own business.

We are happy to have them as third-party providers but we are going to expect some movement in the way they lend over time.

Yes.

And as we mentioned, the profitability difference is significant so we are actually happy to trade three of those for one CAF sale any time you tell us -- or any time we can take that trade.

That is why it is another difficult thing to really figure out because I mentioned all those other moving parts earlier, it doesn't take a lot of non-Tier 3 sales to make up for a point or two of loss.

Cool, thank you.

Craig Kennison, Robert W. Baird.

I will start with a quick one on subprime and then move in a different direction.

I assume that this has no impact on the fee that you will pay to your origination partners?

No, it doesn't.

As Tom said, we don't influence their behavior.

The one way that we could theoretically do it is by paying them more or less.

But I think you have seen we've announced our tests, we've elected to leave that as is and figure out the business a little bit better ourselves.

That helps.

And then just changing direction here on the real estate side.

Tom, I know part of the strong return on capital that you generate is because you've got a good real estate team that buys real estate at the right price.

What are you seeing in that market today and do you feel like you could still get the kind of returns as those rates -- those costs go up?

We feel pretty good.

We have not committed to a single piece of real estate that we didn't think we could make a very good return on.

So are there things that are coming out of the recession, were there things that were less expensive than they were before?

Sure.

And now going into places like -- starting to look at Portland, Seattle, San Francisco, Boston, Philly, are there places that are more expensive?

Absolutely.

But we expect to sell more cars there.

And we've also done a nice job over the last few years of improving our profitability.

So in terms of availability and our ability to make a great return, it has been no problem at all.

Thanks.

And with respect to reconditioning costs, obviously you have moved the needle there over time.

Is there still any room at all to reduce cost there?

Yes, we do still think there is some room.

I think it as we have said before, the next 50 or 100 will be a lot more difficult than the first 250 or so.

But it is a constant effort for our teams to try to figure out how to get more consistent and how to eliminate waste from the system and at the same time not compromise our quality.

So I think our store teams have done a fantastic job to this point and I expect to still be able to make progress going forward.

Great, thank you.

Scot Ciccarelli, RBC Capital Markets.

Good morning, guys.

It will be remiss of me not to ask at least one subprime question here.

We might have to Belichick you and just say, look, we have already answered that question seven times.

And I have heard that from you before, actually.

So I guess my question is, where are you comfortable with subprime penetration levels?

I mean historically you guys have kind of talked about -- Tom, you have kind of talked about 20%-ish kind of level but now you are experimenting it with -- experimenting yourselves with subprime.

Like does the thought process in terms of how much subprime is going to be as a total of your business start to change?

Scot, I don't think it has at all.

We don't know the right number but one thing I think we need to be clear about is we are not intending to drive subprime penetration in our business up by getting into this initiative here.

As I said, we are looking at potentially being one of several partners.

We will have our own set of credit parameters and our own origination model which we do not expect to be more aggressive than our partners.

So I don't think we are giving any indication that we think we are moving -- trying to move the needle on how much subprime is in the business.

As a matter of fact, that is not our goal at all in doing this.

We don't expect this to have really any impact whatsoever on the percentage of sales represented by subprime.

Yes, we are looking at whether it makes sense to take a share of the profit and to try to mitigate risk.

We have been getting asked for years about the amount of money we pay to get one of these deals done.

And wouldn't it make sense to think about it differently.

And that is what we are trying to do.

Understood.

So it is really a substitution effect here.

But historically you have also talked about you are kind of comfortable with 20% penetration levels of subprime.

Does that thought process change if the new model is -- call it significantly more profitable than what the old subprime model had been?

No, I don't think it does.

As I said, we are not looking to expand the amount of subprime in our channel.

And when you look at the amount of subprime business that we do, it is not out of line with the marketplace overall.

We have looked at external data to that point.

So we are not -- I think subprime is going to be what it is based on customer flow through the door and who is applying and what is going on in the economy.

And we will run a business that makes -- if we -- if this test is successful, we will run a business that makes economic sense.

But I don't think we have -- I feel comfortable that we are not out of line with the mix of subprime in the auto space, in the used auto space and we're not trying to drive it up.

And, Scot, we have never really put a number on that.

What I have always said about this segment of the business is each individual customer first of all is getting a great deal at CarMax because we're not changing the price because they happen to be in this segment.

Second of all, we have been subsidizing the deal by paying a discount to get them done and we deliver a very high-quality product.

So I think if you are in this credit space, we are a terrific place to buy a very high-quality car and get a great experience that maybe you can't get elsewhere.

And also since these lenders don't see the loan until all of the other providers have declined, we have been sure that these customers and these sales are 100% incremental.

So despite the fact that they are lesser in terms of profitability, it is 100% incremental profit.

So on an individual customer basis, we feel really really good about this offering.

And as Tom said when you look at it as a percentage of our total sales, we are going to sell 500,000 cars this year.

You would expect us to be somewhat representative of what kind of credit mix looks like in the US and that is kind of where we are right now.

Okay, understood.

You know, I will ask about the test that you are doing though like some of your -- some of the loans within your typical CAF portfolio are already subprime if you just kind of look at what FICO scores are and APRs and the securitizations.

Why the call out about the test because you don't want the blended FICO score or credit quality of existing securitizations to change?

Well if you -- you are absolutely right, Scot, that we do serve a wide spectrum of credit as I mentioned before and we are looking at this as an expansion.

But the way the credit routes in our business is it goes to CAF, it goes to our Tier 2 lenders, it goes to our Tier 3 lenders.

We want our customers to have an opportunity to get all those various offers and get the best financing for them.

And this is just -- this particular space are customers that we have not served before.

But I would say that you are right in that some of the stuff we originate ends up performing like this which gives us more confidence in our ability to manage it because we have been managing receivables; although it is a small percentage, it is still a big enough chunk that we feel like we have experience to do this well.

And part of calling it out is to separate it out and look at it as a separate investment and see if we can make a return on it.

But if we just originated this different set of business and put it into the securitization, we wouldn't get as good as favorable terms as we are currently getting.

And as Tom said, once we get this all -- a test in place and we decide whether or not we want to go forward, we will figure out how to fund it then.

Okay, that is all very helpful.

And then just one more question regarding wholesale.

It looks like wholesale units were a bit sluggish.

I know you guys don't break out comps for the business but given the store growth, it would suggest that the comp would be in negative territory, which just seems odd given kind of the strength of the rest of your business.

Any thoughts there, Tom?

No, I still think -- I have always thought that wholesale and retail over time will grow around the same.

And you have been following us for a long time, you have seen huge swings that don't necessarily match up.

If you go back to 2001, I know that is a long term to look at it, our wholesale growth and our retail comps have been about the same.

And I expect that over time.

So 4% this quarter compared to 15% sales growth is a little bit off but I think over time they will be more closely aligned.

But nothing that you noticed in terms of why the wholesale unit growth was slower this quarter -- maybe buying fewer vehicles or something?

No, no, I mean clearly we bought -- we bought more because we had growth.

But not as many as what our sales growth would have predicted.

But in terms of our buy rate, it was very strong and we don't see any reason to worry about it.

Got it.

Okay, thanks a lot, guys.

Rod Lache, Deutsche Bank.

Good morning.

It is Dan Galves for Rod.

I came on the call a little late, has anybody asked about subprime yet?

So I got a couple of questions on -- the first one is related to the new stores that are kind of now in the comp base -- would expect that they are growing faster as they ramp up to the corporate average.

Do you see that as providing a meaningful positive to your same-store -- overall same-store comps yet or is that something still to come?

It is all just built into the comp expectation.

And remember too that the base is so much bigger that even when you get a store in say its second year and it has a higher percentage comp growth, it is a very small number of units in the big scheme of things.

But as you end up with 30, 40 stores in the next couple of years that are in year two and year three, do see that as being a potential positive to comps?

Yes, but as we have talked about a comp range in the past of something like 4% to 8%.

We think that range is still a pretty good one.

One other thing to remember is we're going to open a lot of stores back into existing markets.

So sometimes a satellite store can actually hurt comps in the other stores because there's some cannibalization.

So it is a pretty complex model to figure out.

Okay, got it, got it.

And then the last one is the third-party finance fees, just rough math if you divide that by the subprime volume in your business, you get to about $800 per unit.

Is that the right way to think about it or are there -- is there third-party finance income in there as well?

Just looking -- yes, go ahead.

We said this before.

In our subprime segment today, we pay about $1000 a car to the third-party provider.

Okay, thanks very much, appreciate it.

Rick Nelson, Stephens.

I would like to ask you about provision for loan loss.

It looks like it picked up sequentially.

If you could speak to delinquencies, what you are seeing there?

The provision for loan loss picked up dollar wise year over year but as a percent of receivables, it is flat.

And if you are saying sequentially over the quarter this is the time of year where we will typically see coming into the holiday season delinquencies may pick up a little bit.

But that is a normal seasonal trend.

People are focusing on other payments.

Got you.

Also curious about the CFPB.

They put out a bulletin in March.

How that is affecting your other third-party credit providers and if that is having an impact at CAF?

I don't -- to date it has had no impact at CAF because we had not been visited yet.

We have spoken with our third-party providers who have had interaction with the CFPB.

I don't believe it is impacting any of our business.

Their focus is on a couple of things.

One is making sure that people are treated equally and fairly.

Two, that products aren't overly profitable.

But as I said as far as Wells Fargo or Cap One and the impact on the business they are doing with us, we haven't seen anything.

Thanks a lot.

And good luck.

Jamie Albertine, Stifel.

I dialed in a little bit late.

I just wanted to follow-up if I could on the SG&A side of things.

We have talked about it both with you guys at your analyst days and heard you refer to it on prior conference calls.

But from a SG&A per-unit perspective, can you just remind us kind of where we are today versus prior peak?

And you have done a really good job of highlighting the opportunities on items like reconditioning costs coming down and it sounds like there is still room to go there.

But maybe if you can talk sort of high level about your top two or three priorities as it relates to SG&A cost reductions and therefore leverage as your growth story sort of plays out for the next two or three years.

Thanks.

I don't really know what the peak was but we were down almost $100 per unit sold in the third quarter compared to last year.

You referenced reconditioning costs.

Remember reconditioning costs are in cost of goods sold not in SG&A.

So we kind of try to think of those two things as one big bucket of opportunity.

We will eclipse $1 billion of SG&A this year and probably I don't know -- $600 million or so of reconditioning.

So it is a pretty big -- pretty big opportunity to try to find efficiencies.

In terms of our priorities, it is largely in the SG&A bucket, it is largely going to be around how do we operate our stores consistently, how do we staff better, how do we make sure we are properly staffed for peaks and for valleys in terms of traffic and sales?

And you know it is a pretty seasonal business.

It's a pretty labor intensive business, so there is lots of opportunity to try and get more and more efficient in that regard.

So that is kind of where our efforts are focused there.

We are real proud of all the progress we have made on the cost of goods sold side in terms of reconditioning.

But I think with SG&A, there's probably some opportunity in there and we are focused on going after it.

Thanks for clarifying -- I should've clarified that and I apologize and I appreciate you calling that out on the COGS side.

Is it fair to say then if you look at the two buckets, it is predominantly going to be more SG&A driven from this point going forward given that the bulk of reconditioning improvement you have already booked?

Not necessarily because the bulk -- remember the bulk of SG&A is going to be rent and advertising and some of the fixed overheads -- we can only make so much progress on.

We have to have enough people in our stores to have them up and running and pay our bills.

So I think when you look at the two buckets and you break it out into things that are somewhat less manageable let's say, there is opportunity in both.

Appreciate.

Thanks and happy holidays.

Bill Armstrong, CL King & Associates.

This is the first we have heard of any hiccups in the overall subprime auto lending market.

And you mentioned earlier that you do not believe this is CarMax specific.

I was wondering if you can maybe elaborate on what you are hearing or seeing in the market that leads you to believe that this is beyond CarMax?

No, I think we have had conversations with our partners.

And as I mentioned they have -- CarMax is a part of their overall portfolio.

And they fine-tune that portfolio in their origination standards based on what they are experiencing.

And I think that is the result of us, other business they are doing, and all I can say is that they have indicated that this is not a CarMax specific issue.

If the subprime consumer is starting to get a little overextended with debt, particularly auto-related debt, how does that impact your view on this test that you are now doing?

It sounds like it might be -- you might be extending that at just the wrong time.

How do you look at that?

If you believe the market has been over heated over the last couple of years then the last couple of years would have been the wrong time to enter this.

We are not trying to time the market, we are not trying to figure out what the best time to enter is.

This is a longer-term initiative.

The reason we are going now is because we are ready to go now.

We have been working on it for over a year and we are in a position where we believe it can start originating and servicing sometime this quarter.

And remember, this is a very small test for us.

This is smaller than other tests we run at CAF as far as pricing and terms.

And at the end of the day while we are going into it expecting to make some money, it is not material to our overall business or even to CAF's overall portfolio.

Understood, okay.

And then just one quick housekeeping question.

The increase in allowance on ESP returns, what was the dollar amount on a pretax basis?

It was -- it is $0.02.

Right, what was the dollar amount on a pretax basis?

Yes, we don't disclose -- we haven't disclosed dollar amounts on our estimate adjustments.

Okay, thank you.

And I am showing no further questions at this time.

Okay, thanks, everyone.

Happy holidays.

Thanks for all your support and continued interest and of course, thanks to all of our associates for their dedication and their hard work and what they do every day to make CarMax what it is today.

We will talk to you again next quarter.

Thanks.

And this does conclude today's conference.

You may now disconnect.