車美仕 (KMX) 2015 Q4 法說會逐字稿

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

At this time I would like to welcome everyone to the fourth-quarter fiscal-year 2015 earnings call.

(Operator Instructions)

Thank you; and Ms. Katharine Kenny, you may begin your conference.

Thank you, Jennifer, and good morning.

Thank you all for joining our fiscal 2015 fourth-quarter and year-end earnings conference call.

As always, on the call with me today 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 ending February 28, 2014; a new one will be out shortly, filed with the SEC.

Before I turn it over to Tom, I just want to ask you all to remember to please ask only one question and a follow-up before getting back in queue, so everyone has a chance to ask a question.

Thank you.

Tom?

Thank you, Katharine.

Good morning everyone.

Thanks for joining the call today.

As you saw by now, we had both a record fourth quarter and a record fiscal year.

During the year total revenues grew to more than $14 billion, and we sold nearly 1 million total vehicles: more than 591,000 retail cars and 376,000 wholesale cars through our in-store auctions.

Here are some of the key highlights for the year.

Used unit comps up 4%, and total used units grew by over 10%.

Wholesale vehicle gross profit up 16%, driven by a 10% increase in units sold; and an increase in wholesale gross profit per unit of $54 per car.

CAF income up 9% to more than $367 million.

Tom will give some more details on that in a moment.

Excluding the items we highlighted in the press release, net income for the fiscal year increased 16% and EPS grew 21%.

Our data indicates that for the calendar year 2014 we increased our share of the zero- to 10-year-old used vehicle market by approximately 5%.

We also continue to focus on returning value to shareholders through our stock repurchase program.

During fiscal 2015 we bought back 17.5 million shares at a cost of a little over $900 million.

Since we began the program in fiscal 2013 we have purchased more than 30 million shares.

Now on to some of the key drivers for the fourth quarter.

Used unit comps up 7%, driven by an increase in traffic as well as an improvement in conversion.

Total used units grew by 12%.

Wholesale gross profit up 22%, reflecting a 12% increase in units sold, and an increase of $83 in gross profit per unit.

CAF quarterly income up 12% to $90 million.

And again, excluding the items we shared in the press release, net income for the fourth quarter increased 20% and earnings per share up 28%.

With that I will turn it over to Tom, and he will give you some details around CAF.

Tom?

Thanks, Tom.

Good morning everybody.

CAF recorded another solid year, with 9% income growth to $367 million and growth in average managed receivables of 19%.

As Tom mentioned, in the fourth quarter CAF income was $90.4 million, up 12% compared to the fourth quarter of fiscal 2014, and Q4 average managed receivables grew 18% to $8.3 billion.

CAF's weighted average contract rate -- that rate that we charge to customers -- was flat to last year's fourth quarter at 7.2%.

This rate continued to be relatively stable at around 7% for the past couple years.

The allowance for loan losses grew to about $82 million.

This represents 1% of managed receivables, which is relatively consistent with last year.

But during the quarter and the year CAF income did benefit from favorable loss experience.

CAF net penetration was 40.9%, compared to 40.1% in last year's fourth quarter.

This figure includes originations from our subprime test; and if you back out those originations, this quarter's penetration would have been 40.2%, which is similar to last year.

Net loan dollars originated in the quarter rose 16% to $1.2 billion due to a combination of CarMax's unit sales growth, our modestly higher penetration, and a small increase in the average amount financed.

Finally, we intend to continue with our subprime test.

Recall that our primary goal for this investment was to gain knowledge regarding the space, and we expect these learnings will prove invaluable.

While performance to date is in line with our expectations, we believe allowing the receivables to season deeper into their life, including maturing through a full tax season, will better equip us to assess our long-term strategy.

On average the term of these contracts is nearly 70 months; and at fiscal year-end the average time on our books for the loans is less than seven months.

We are comfortable continuing to originate at the current target volume, which is 5% of CarMax's subprime sales, or a little less than 2% of CAF originations.

Tom?

Thank you.

As far as mix of sales, sales of zero- to 4-year-old vehicles grew to approximately 75% of our total sales, the same as the third quarter, but over 5 percentage points higher than last year's fourth quarter.

Sales of SUVs and trucks as a percentage was similar to last year.

SG&A for the quarter increased approximately 11% to $330 million.

Contributing to this growth was the addition of 18 stores since the beginning of the fourth quarter of last year and a $9 million increase in share-based compensation expense.

On a per-unit basis, SG&A decreased $23 to $2,186, compared to $2,209 in the fourth quarter of fiscal 2014.

During the fourth quarter we opened one store in our new Cleveland market -- and Katharine's hometown.

Thank you.

Since the fourth quarter we opened two more stores: one in Minneapolis, a new market for CarMax; and one yesterday in Turnersville, New Jersey, which is part of our Philadelphia market.

In addition to these two we plan to open 12 more stores in fiscal 2016, plus the relocation of our store in Rockville, Maryland.

In regard to our small format test, we have now opened five stores; and as a group they are performing at or above our expectations.

We expect the small format stores to be a part of our store openings going forward.

Of our 14 store openings in fiscal 2016, there will be three small format, including our first small format front store with full production capability in the back.

That will be in Gainesville, Florida.

Also we now plan to open between 13 and 16 stores annually over the next three years.

Store traffic was up once again in the quarter, and our Web traffic also continued to expand.

For the fourth quarter, average monthly Web visits grew over 9% compared to last year's fourth quarter, to over 14.5 million visits.

Visits to our mobile site now represent approximately 32% of the total, while visits utilizing our mobile app represent another 16% of the total.

With that, we will open it up for questions.

Operator?

(Operator Instructions) Brian Nagel, Oppenheimer.

Good morning; congratulations on that nice quarter and nice year.

I've got just a couple questions here; a question, I guess, and a follow-up.

First off, just a point of clarification.

You mentioned the subprime test and the continuation of that test.

So are you now planning to go above the prior stated $70 million size in the test?

Then, if so, how should we think about, I guess, what could be the new volume relative to that initial goal?

Then I'll come back with (multiple speakers)

Brian, I am sorry if I wasn't clear; but I think in the release we say we did $72 million up to the end of fiscal 2015.

So that gives you -- that's what we did through the year.

What I meant -- what I said is we are comfortable continuing at the same pace, which is about 5% of the subprime business that CarMax does.

So if subprime continues to be a similar number of our sales as last year, it would be a similar pace of volume for us.

Okay, that is helpful; thank you.

Then also on this follow-up, also on the subprime business, as you look at not just what you originate but what your partners originate as well, any commentary there about willingness of your partners to lend?

There was I guess a couple quarters ago we saw some type of disruption, (inaudible) rumblings in the market what is going on out there.

Have you seen any shifts at all in the willingness of your partners to lend to subprime based accounts?

Well, I think if you look year-over-year we are at 17% versus 17.6% as a percent of subprime in the business.

Last year's fourth quarter is when we really first started feeling any changes in behavior.

And as I mentioned, I think on the last call, we have seen pretty consistent behavior out of our partners for the last several quarters.

The key thing that we are looking at is the quality of their offers and what that translates into is how many of the customers that receive offers from them actually convert to a sale.

Our subprime partners cannot control the nature of what is coming into them, because the Tier 2 lenders are looking at it ahead of time and have the first look at that.

So on the basis of conversion of offers, we have seen their behavior be very consistent; and we are very happy with their performance.

That is very helpful.

Thank you.

Congratulations.

Sharon Zackfia, William Blair.

Hi, good morning.

I think this might be in the press release; you indicated you are doing 15 remodels this year and one relo.

I don't really remember any remodeling program at CarMax, so can you talk about what you expect to do in the remodels, if there is anything operationally that that will affect, or if it is more cosmetic?

And then the relo, just where is that?

And is there the opportunity for more relos in the CarMax system?

Sure.

First of all over our history we have constantly spent capital on keeping our stores up to date and renovating them over time.

Since we launched the next-gen concept -- I forget, four or five years ago now -- we have now gone back in and we are applying some of those technology changes with some more digital screens and some digital capabilities in the stores, as well as open seating -- which we really had prior to next-gen, but we think it's a much more efficient use of floor space.

So the conversions are a little more extensive than they have been, because we are doing a combination of technology and converting, whether it is cubes or offices into floor space.

We just finished converting our Richmond store; it looks fantastic, and that is the oldest store in the chain.

I think we completed three or four full -- of these types of conversions, and they are a little bit more expensive than the money that would have been spent, so we just thought we would call it out.

We plan to do another 17 this year.

In terms of the operational changes, it doesn't change much operationally.

But I think it provides a better experience for our customers and a better working environment for our associates as well.

So we have been pretty pleased with what we have done so far, and we will gauge the results going forward and see how much more aggressively we want to spend.

In terms of the relo, that is our Rockville store.

Our Rockville store was originally a competitor who built kind of a copycat; it is a very small footprint.

I think it is only on 5 acres or so, and it has been a very successful store for us.

This is just a situation where the lease was up for renewal, and we took the opportunity to move.

We are really only moving a short distance away from that store to a much bigger facility.

And that store has been very successful for us, but was really undersized the whole time we had it.

At this time we don't have any other plans for relos; this one was just more opportunistic as the lease came up.

Okay, great, thank you.

Scot Ciccarelli, RBC Capital.

Good morning, guys.

I think the last couple quarters you talked about Tier 2 becoming a bit more aggressive in terms of their lending.

And that was -- that subprime penetration was starting to moderate a little bit, but as subprime penetration rebounded, at least sequentially the last two quarters, does that mean Tier 2 has pulled back a bit?

Or should we just view that as more overall credit availability when you look at the overall market?

Scot, this is Tom.

I think you are better to view it as Tier 3 stabilizing versus reading anything into overall credit availability.

Tier 2 is still doing very strong for us, and as I said we are happy with our partners.

We've brought in some new partners.

We have a really good, diverse stable of finance partners in Tier 2, and it's performing well for us.

Can you give us an idea of what Tier 2 has done on a penetration rate on a year-over-year basis, Tom?

Typical, what we have seen is something in the low 40%s for CarMax Auto Finance; and we have said 20% to 25% gets financed outside the CarMax system; and the rest being kind of split between Tier 2 and Tier 3. I would say that in the current environment we are looking at the lower end of that 20% to 25% for other.

So tier 2 and Tier 3 are doing 35%; and we said Tier 3 was at 17%.

So that gives you a pretty good flavor.

I got it.

Okay, thanks a lot, guys.

Craig Kennison, Baird.

Good morning; thanks for taking my question.

First, could you just give us the buy rate, if you did not provide that in the quarter?

Then second, related to your ad spending, it appears to have declined after four quarters of strong growth.

How should we think about ad spending going forward, and what are your key priorities for marketing under your leadership there?

Thanks.

What was the first part again?

The buy rate.

Sorry.

Yes, the buy rate was right around 30%, very similar to last year.

And in terms of ad spend, we did a Super Bowl last year; we did not do Super Bowl this year.

So most of the change is just the subtraction of Super Bowl year-over-year.

But in terms of a regular scheduled spend, it was in line with what we were trying to accomplish.

Any change in priorities under the new leadership?

We are making a lot of changes, and we are evaluating how best to spend our money.

But that will be an ongoing process for us.

So a continued strong effort on TV.

We are pretty much out of print and have been for a long time.

And continuing to try to optimize our paid search as well as trying to improve our SEO, our search engine optimization, through organic search; and continuing to test using outside partners as well.

So a similar mix, but we will see what happens going forward.

Great.

Congratulations.

Michael Fassler, Goldman Sachs.

Good morning.

It is Matt Fassler from Goldman Sachs.

Go figure.

My primary question here relates to wholesale.

You had, from what I can tell, is the highest level of wholesale profitability per vehicle you have ever had in the fourth quarter.

You also had the biggest year-on-year increase in wholesale gross profit per vehicle that you have had in about five years.

Just curious whether there is anything in the backdrop, other than your stellar execution, that would lead to that kind of pop in the wholesale profit number.

First, thank you for calling our execution stellar.

You know, really good execution continues to build year-over-year.

You're right: it is the first fourth quarter we have ever had that exceeded $1,000 in profit per car.

We have had two first quarters that have done that in the past.

But as our reputation builds as a great place for dealers to come and buy this type of product, I think our stores do a great job of marketing.

It's always a balancing act between wholesale margin and making sure we have a very strong buy rate.

Remember, lots of the customers that are selling us these cars are also buying a car from us.

So a good barometer for how fair we are being with our customers is our buy rate, which I just mentioned was very strong at 30%.

So again this is -- wholesale is always a balance with retail.

It is never a standalone business that can be managed separately.

You always have to pay attention to what is happening on the retail side.

I'm really proud of the stores and how well they have executed.

We have some stores that are particularly tight on space that have to manage running -- some stores are running two auctions a week now out in California.

And we've just -- the stores have done a fantastic job of managing relationships and making sure we get great attendance, and that has led to great performance.

Has the fact that prices, based on some of the Manheim indices, have been particularly resilient -- maybe surprisingly so -- been a part of the profitability story here?

Or would you say this is independent of that?

No, I think that is a factor too.

Usually this time of year coming out of the winter you start to see some movement up in the Manheim index, and we see that as well.

That is always a little bit of a tailwind for us in terms of margin, when we see an appreciating market.

I don't think it was up that much in the last report; but it is typically a time of year when we see some appreciation.

Then just by way of follow-up -- and hopefully you will consider this a public service request rather than a question.

Just a little bit of color on the capitalized interest addback and just what that number is and why it would have looked different this quarter versus prior quarters.

Matt, the only thing we can really say about that: it was a miss on our part.

We are required to capitalize interest on construction projects, and net it against other interest expense.

You saw it was $8.9 million in Q4; $6.9 million of that related to periods before Q4 this year.

Looked back at other periods and made a determination that the impact is not material on any earlier period; so it is just something we will be doing going forward.

But it was a miss.

So it would have showed up in prior periods, and you showed it here as a catch-up, if you will?

Yes.

Got it.

Thank you so much, guys.

Matt, it all would have been in this year.

Yes.

Understood.

James Albertine, Stifel.

Great, thanks for taking the question and congratulations as well.

I just had a quick housekeeping item.

I just noticed your cash balance was one of the lowest you have had in quite some time.

In light of the store growth and the renovations and remodels and everything you are working on from that perspective, is that something that is temporary?

Or how should we think about that from the fourth quarter?

As far as the cash balance goes, I can walk you through what we did this year.

If you look, we went through $600 million in cash, plus took out a $300 million term loan; that is $900 million.

Our stock buyback during the year was a little bit greater than that; it was $917 million.

So what that means is all the other spend that we had during the year -- CapEx, needs for cap, and inventory, which again totaled over another $900 million -- were covered by cash flow in the core business.

As far as liquidity goes, we are in an environment where we feel pretty good about our banks' willingness to step up and live up to their commitments on our revolving credit facility.

We have a $1 billion facility.

We will manage to some amount of liquidity that we can run the business with.

But I think the decline in the cash balance was planned and deliberate, and the business is still generating a lot of cash; and if you look closely at it, it reflects that.

We've talked in the past about moving towards a more optimal capital structure.

So this is just us delivering on stuff that we have already talked about.

Very good.

Just a quick follow-up if I may.

Just any thoughts on the Wells Fargo announcement with the capping of subprime loans?

And if we start to see that elsewhere, how should we think about that broadly over the market?

Thanks.

I am always hesitant to talk about anything outside of CarMax with regard to subprime, because everybody thinks about subprime differently.

If you recall, Wells Fargo is not one of what we call our subprime partners; but I am sure in the Tier 2 space they originate loans that some people would define as subprime.

So that is one thing.

That is really evidence of why we keep a diverse stable of partners, to make sure that our customers have access to financing and access to good credit offers at all times.

And I think we feel like we're in pretty good shape there.

Also, historically we have believed that our partners have opted to direct volume towards CarMax at the expense of other places because they like the origination channel, the clarity of information, the knowledge about what the asset is really worth, etc.

So we have observed in tough times before that we felt like we were less impacted than other folks.

Who knows what that means going forward?

But that is probably as much color as I can give you.

Great.

Thanks again and good luck.

Arum Rubinson, Wolfe Research.

Good morning, and terrific results.

A question for you on technology, if it's okay.

I think you said your Web traffic was up 9%.

I know a lot of retailers have Web traffic up a lot more than their own sales.

So irrespective of that I'm hoping you can give us a little lens or window into technology as you are using it incrementally to run your own business and enable sales.

And also maybe from the competitive standpoint, what you're seeing out there in terms of technology or apps or things like that, that might be causing any pressure down the road.

Thanks, Arum.

We have used technology in our stores from the very beginning in a combination of things, both for our associates and for our customers.

We employ a lot of use of data, and the ability to deliver that data back to our employees at the moment they need it to make good decisions.

We have lots of ability to track customers through the process and make future decisions based on that.

So I think we've done a pretty good job of utilizing technology in our stores so that our associates can deliver a great customer experience.

In terms of customer-facing, it is something that we continue to invest in and will continue to invest in more going forward.

We want to make sure that we can communicate with our customers however it is that they want to communicate with us.

I've talked in the past about being a little bit behind in terms of mobile.

We will continue to invest there.

We've made lots of improvements over time to our pictures and the quality of our pictures.

We used to take one, then nine; we are up to around 40.

We have high-definition pictures.

We have zoom capability.

We have adjusted our landing pages to be more personalized, and we will continue to make some efforts in that regard as well.

I think you will see us do a lot more stuff as it relates to mobile and touch screen.

That's more than 50% of our total hits to our website are now coming from either a mobile device or a tablet, and it is something that we need to make sure that the customer has a fantastic experience if they want to communicate with us in that format.

So those are the kinds of things we continue to invest in.

We have tested online capabilities, which is a lot -- you see a lot of nichey type things from various -- whether they are competitors or people who enable our competitors.

Things such as online credit applications, which we are testing; the ability to transfer a car from one location to another without speaking to a sales consultant; the ability to put a credit card payment down to have those cars transferred, which we are doing.

You can go online and put a car on hold.

You can make an appointment with our sales consultants.

So we have done a lot of stuff to make sure our customers can do more and more of the process from home.

They can fill out a good chunk of the paperwork before they show up at our store.

But all these things are the types of stuff that we need to continue to invest in.

But I think we've made a lot of nice progress, but we got a long way to go.

It sounds like you are not resting on your laurels.

Thanks a lot.

Michael Montani, Evercore ISI.

Good morning, guys.

Thanks for taking the question.

Just wanted to ask about productivity in terms of used units sold per dealership.

I guess the way I was thinking about it is, pre-recession you guys average about 4,800 units, which was well over 4,000 of zero- to 4-year-old cars, by my math.

Just looking ahead, in coming years we think the supply of zero- to 4-year-old vehicles is going to grow by about 25% to 30% over the next five or six years and ultimately could drive a 10% to 15% tailwind in your throughput.

Can you just comment on that at all?

About maybe what some of the risks are to that, or is there something that I am missing?

Then secondarily, would just love to get your thoughts around profitability on a dealership level.

If you are able to get that kind of throughput, any structural impediments to retail EBIT margins going up in that environment?

First, on your comment about throughput annualized of zero- to 4-year-old cars, we have never been just zero- to 4-year-old cars; we have always been zero to 10.

So it is a much broader spectrum of vehicles than you stated there.

That number did change over time.

As I stated in my comments, zero- to 4-year-old cars represents 75% of our sales; that was 70% just a couple years ago, so it has moved by about 5 points.

But you have to look at a much broader spectrum of inventory to look at total sales for CarMax.

It does look like you would see a supply movement in zero to 4, just based on movement in SAAR.

And as I have said before, we have historically had higher share in the zero- to 4-year-old segment.

So is there a potential tailwind?

Probably.

But the other factor in there is consumer behavior, and will they trade out of cars as much as they used to.

And you have population growth and new drivers and things like that, so there's lots of different variables and factors.

I don't think you can just say we expect whatever the number you said, 20% or 10%, I forget what number you said there.

But I don't think we can just expect that as an increase in sales.

In terms of how do the stores handle it, we've been able to deliver exceptionally high volumes out of some pretty limited space in our stores.

And all comp sales are more profitable than sales once you have cleared all of your expenses, so it is very, very profitable for the Company to continue to deliver comp sales out of existing facilities, because a lot of your fixed overhead remains constant.

You really just have to add some variable overhead.

So we are really pleased with the comps we delivered over the last couple years.

I think it is one of the great parts of our business model, is that our stores continue to grow.

As I said we gained 5% share during the year; that is on top of a 17% share gain the year prior.

But once again that is over zero- to 10-year-old cars.

So I think our stores are well primed to take advantage of supply increases, if that translates to sales.

And then they are well positioned to turn that into better-than-average profits because they are all on top of a base that is already covering fixed overhead.

Thanks.

Congratulations and good luck.

Seth Basham, Wedbush.

Good morning and thank you.

My question is around comp sales growth.

Tom, you spoke to traffic and conversion driving the comp.

Maybe you can break that down: how much of it was traffic and how much was conversion?

And related to that, what was driving the better conversion?

Seth, that is a good question.

We get that frequently.

It was roughly 50-50 in terms of conversion and traffic.

I have always thought that over time it will be 50-50.

It doesn't line up all of the time.

Sometimes it all comes from conversion; sometimes it all comes from traffic.

This happened to be one where it matched up.

As we've looked at it over a very long period of time and the way we think about it going forward is -- I would like to be able to continue to increase traffic through our stores and I would like to be able to do better with the traffic that we have.

In terms of what are we doing to improve conversion, we have some really fantastic people in our stores that are dedicated and committed every day to giving the customer a great experience.

We have tried to do a good job of providing additional training.

Some of the stuff I talked about earlier in terms of technology as it relates to information and capabilities that our associates have we have improved over the last several years and plan to continue to improve going forward.

So I really think it is just a testament to our 20,000 dedicated employees in the stores who work really hard every day to try to be more and more efficient and give the customer a better experience.

Hopefully that turns into higher sales.

And then they in turn go and tell all their friends and become spokespeople for CarMax.

It has worked for us in the past, and I expect it to keep working going forward.

Got it.

So you would attribute it primarily to training.

Would you say there is any difference in the quality of credit offers or the credit availability that has affected the conversion trends over the last few quarters?

That is another thing that is constantly on the move.

It is a combination of what we do, a combination of what our partners do.

I think Tom mentioned in his -- this was a relatively stable year compared to some in the past where we have seen some movements, whether it is up or down, from some of the lenders.

We saw a big pullback during the recession; we saw some changes over the last couple years in subprime, up or down.

But this year has been relatively stable in terms of credit.

Great.

Thank you, guys.

Rick Nelson, Stephens.

Tom, a couple of franchise dealers have opened stores recently in your markets.

If you could comment there, the impact that they might be having and how you respond from a competitive standpoint, and overall thoughts on those concepts.

Sure.

Thanks, Rick.

I know Sonic opened some stores in the Denver market and Asbury opened some stores in the Florida market.

We are clearly more established in Florida; we've been there for a much longer period of time.

Neither of those concepts have been open very long, so it is very difficult for us to read any results or impact at this time.

When we have some, we will be happy to share it.

But both of those concepts have been open for a very short period of time, and I really can't comment on their performance.

But Sonic has been open for less than six months and Asbury has been open I think around a year.

The stores are a little bit smaller than ours.

Some of those are closer than others.

But so far it is too early to comment.

Got you.

The market share gains that you talked about in the zero- to 10-year-old bucket, can you discuss where the gains are the biggest?

Is it in that 4-year-old bucket, or the more aged vehicles?

Rick, I actually don't know the answer to that; I'm not sure we have it in that level of detail.

We generally get the whole market.

You saw that we said it's through calendar year this year.

This is the data that we have bought.

The reason we have gone to yearly announcements is the data is very -- I would call it unstable in the short term.

So we are pretty confident in the direction and the number, but in terms of dividing it very specifically, we haven't really done that.

Got you.

Thanks a lot and good luck.

Bill Armstrong, CL King & Associates.

Good morning, guys.

I see that your average selling price for retail was down about $600 sequentially.

Is that a function of mix?

Or are you seeing maybe some declining pricing trend?

Then related to that, when you are out buying cars at auctions what sort of trends are you seeing right now in terms of supply and price trends?

That is mostly seasonality.

We see a seasonal drop in the fourth quarter.

Really fourth-quarter over fourth-quarter our average retails were up slightly.

So not really much there.

If you look at our mix sequentially of zero- to 4-year-old cars, it didn't really move very much.

It did move from this year's fourth quarter compared to last year's fourth quarter by almost 5 points, which would lead you to believe that maybe prices would go the other direction.

So I think it is more just seasonal movement and nothing really else to read into there.

In terms of what we are seeing at the auctions, this is a time of year when we always see appreciation in the marketplace.

If you look at the most recent Manheim index there really hasn't been very much movement.

But if we were just thinking of it as a normal year, we would come out of January and head into the spring and expect some appreciation in the marketplace probably into early summer; and then we would see a normal decline through the fall, if this is a normal year.

But we don't like to make a lot of predictions about the way the market is going to go.

I think we've talked in the past about our ability to adjust and move and adapt to whatever the market brings to us.

We plan our inventory on a weekly basis.

So what we are seeing right now in the wholesale marketplace is not really out of line with what we would have expected.

There is a lot of anticipation I guess of lots -- an influx of more supply at the wholesale coming from off-lease vehicles and trade-ins, etc.

Are you guys seeing a more plentiful supply when you go to auctions every week, or not necessarily?

Not necessarily.

Remember too that leases that are originated -- I think lease percentage is at a pretty high clip right now, somewhere around 30% in the industry.

We won't see those cars for two or three years.

I think a lot of people look at lease percentages and think, oh, you are going to see a big influx of cars when it is really two or three years down the road.

What we have seen in the past -- and we have been at this for 20 years, and we have seen lease percentages in the 30%s and we have seen lease percentages in the teens -- what ends up happening is eventually those cars end up available for purchase, and we have done a nice job figuring out how to have access to them.

Okay, got it.

Thank you.

Paresh Jain, Morgan Stanley.

Morning, everyone.

Just a couple of questions.

First, on the subprime pilot program, just wanted to make sure that the extension doesn't really rule out a meaningful expansion of the program later.

Can you highlight any specific areas that you feel need more time to evaluate versus what you were expecting earlier?

Let me address the first.

I think as I said, the results to date are in line with what our initial expectations were.

This is a different asset class for us, so we are interested in seeing how it performs.

And because it is new to us, we are willing to be patient and ensure that we understand it completely before we do anything else.

It does not rule out us doing a larger amount in the future.

But if you remember, when we rolled this out a year ago we said that there was three things we were looking for.

One is learning, which we are definitely getting on that; and I think that is going to benefit our business whether or not we are in this space.

But the other was a risk diversification play.

We have three partners in the subprime space who are doing an awesome job.

Any decisions we make we'll be contemplating the impact on them.

And I would not expect us to ever intend to be a sole player in this space like we are in the prime space.

Got it.

That is probably as much color as I can give you about where our intentions would go.

Makes sense.

On competition, this is perhaps a more longer-term strategy question.

Over the last 12 months we have seen emergence of a few peer-to-peer used vehicle platforms that try to pass on SG&A savings to customers.

Sure, these new startups are only in a few markets right now; but one can imagine them going after the high-volume used markets first, where you and your peers already have a presence.

So my question really is: what do you guys think about these new business models versus the brick-and-mortar strategy in general?

We look at every part of competition.

In terms of peer-to-peer one thing to remember is that is a huge chunk of the market already and always has been.

About a third of all cars sold in the US are sold from consumer-to-consumer, whether it is you sell a car by putting a sign in your yard, or you list it online, or you used to put it in the newspaper, or whatever you do.

So that has always been a third.

One could argue that that is where those sales would come from, since they are already happening.

It is just such a giant piece -- it is by far the biggest piece of -- the biggest percentage of cars sold are sold from peer-to-peer already.

A lot of what we do in our -- when we make a cash offer to every customer on every single car, I think we probably have tapped into that as well as anybody, by getting some of those cars that maybe would have been sold peer-to-peer.

But it is something we keep a very close eye on, and we will watch very closely and see if there's an opportunity somewhere for us.

Got it.

Thank you, guys.

David Whiston, Morningstar.

Thanks, good morning.

On store openings for the upcoming year, you have got a definite skew towards existing markets over new.

I was just curious if -- longer-term are you going to look to focus more on growing existing over new?

Or will it reverse and focus more on new later on?

It is an ever-changing landscape for us.

As we continue to get more data in existing markets, it gives us more comfort with going back into those markets.

But we have a healthy mix of new markets as well.

One thing to take into account: when we go into a metro market like Philadelphia, Minneapolis, or this year we will be entering Boston, those are intentionally multi-year plays for us to really grow out the market.

So when you see us go back into Philly with the Turnersville, New Jersey, store this year, that is just part of the long-term Philadelphia plan.

It looks like a skew towards an existing market, but those are existing markets that are clearly under-stored and we're not where we expect to be long term.

So I expect it to be a mix going forward.

Some of the big ones that we have coming in the next three years or so -- Boston, San Francisco, and Seattle -- are places where we have no presence.

And it has taken us, I don't know, 15 years to get to 10 stores in LA; and you will see us continue to learn more, figure out places where we're -- ZIP Codes where we are missing, and then try to figure out the best storing pattern to go into those bigger metro markets.

So I don't read too much into that, because as I said some of it is just planned because the markets are bigger and more stores are required to fill them out.

Okay.

On buybacks it would be helpful for modeling if you could give any clarity on dollars spent for fiscal 2016.

We don't give guidance on anything.

But you can look at our release last fall and it gives you an idea of the scale that we have intentions for the longer term.

But it is also going to be a balance based on where we are trading and what we think makes the most sense.

It is something that we have a discussion with our Board on a very regular basis.

We have done it with a programmatic buying schedule that we put a range around, and we are adjust it accordingly based on the environment that we are operating in.

Okay, thank you.

James Albertine, Stifel.

Great, thanks.

I just wanted to sneak one more in.

It seems like given the harsh weather on a year-over-year basis you may have lost some days sales, and maybe it makes your comp look even stronger in retrospect.

But just wanted to maybe ask for your view on the weather, if you will.

As you probably know, James, we never like to use weather as an excuse.

But it was really cold and we did have a lot of stores closed, particularly in the back half of February.

As far as attributing sales loss, we generally think we get it back.

Because when we are closed everybody else is closed.

It is not like milk; if you didn't sell it, you didn't sell it; or a grocer.

It is such an infrequent purchase.

If we are closed, generally all the competition is closed as well.

So I can't attribute a specific sales loss to it, but we probably would have done a little better if it wasn't so cold.

We had a bunch of stores closed in the back half -- particularly in the back half of February.

But as I said, I think generally we get those sales back.

Very good.

Thanks again.

(Operator Instructions) Scott Ciccarelli, RBC Capital.

Thanks for letting me back in here.

Just a quick follow-up.

With energy prices being such a major investor topic today, I am curious.

For a big-ticket purchase like autos, have you seen any noticeable change in the energy-centric markets, like Texas?

Well, Scot, as you have learned over the years we don't really talk about regional differences.

So we are probably not going to start now.

Is there any color you could provide on that?

Just because it does indicate some sort of overall big-ticket demand, even if it doesn't relate directly to your business.

Just change in behavior at all?

I mean, we didn't see much.

So whether it is regional or -- I feel like we had a really good quarter and a really good year.

We have gotten a lot of questions around gas prices and is it potential that lowering gas prices would drive sales towards SUVs and V8s, and we really didn't see much of that either.

So I think possibly because we have such a wide range of inventory and we appeal to such a broad range of customers that some of those impacts are muted with us.

But who knows?

I also think in terms of gas prices that people do not expect gas to be this cheap, and a car is a long-term purchase.

So although you might see some shifting, it really hasn't affected us as much as you might think.

Got it.

Okay, thanks, Tom.

(multiple speakers) gas prices are going to go back up.

Got it.

Thank you.

Rod Lache, Deutsche Bank.

It's Mike Levin on for Rob.

Just wanted to see if you could discuss some of the factors that went into you guys getting increased confidence in raising your store growth plans over the next three years from 10 to 15, to 13 to 16.

Sure.

If you recall, coming out of the recession and getting back into a growth plan, we wanted to have a phased build-up.

We wanted to make sure that we built up our infrastructure; and by infrastructure I mean the ability to go out and source real estate, the ability to make sure that we provide experienced management into all these stores.

We spent a lot of dollars on relo to make sure that that first customer that walks in the door gets a great experience at CarMax.

And our build-up over the few years -- we opened three the first year, then five, then 10, then 13 for two years in a row.

So this is in line with continuing, as the base has also gotten bigger during that time.

I think we have added 50 stores since 2011, increased the Company size from 90-ish stores to 145 or so.

And we opened 13 this year, and we plan on opening 14 next year.

So it is right in the -- in the range of what we delivered, and we wanted to give ourselves some flexibility.

These are big complicated stores; sometimes one or two might slip in or out of a year.

So we like to put a range around it.

But we don't plan on opening 10, anymore, so that is kind of the range we think we can deliver over the next few years.

It is confidence in all of the things that I talked about, and that is the reason we raised the range.

That is great.

Maybe just a follow-up.

Can you guys let us know how you are thinking about the pace of buybacks going forward with some of your increased capital plans?

I think we hit on that a little earlier.

But as Tom mentioned I think our goal is to be in it programmatically.

If you look at what happened in Q4, we bought back fewer shares and spent less dollars at an elevated stock price.

So we put some buffers on our program based on our estimation evaluation.

But in general we want to be in the market on a continuous basis and programmatically move towards a capital structure that has got a little bit more leverage in it.

I think you will see us doing that over the next couple years.

Great.

Thanks, guys.

Congrats on the results.

Michael Montani, Evercore ISI.

Just wanted to follow up on two things.

One was inventory per store, which I had up low double-digit.

I was just trying to understand: how much of that might be anticipated buildout as you increase the unit growth, versus like a desire to actually increase fill rates and have more cars on the lot?

Then secondly, with CapEx going from $310 million to $360 million, can you just help to understand how much of that is related to the remodels versus the new store acceleration, and what the major buckets are of spend there?

Sure.

What was your first question again?

Oh, inventory, yes.

Inventory in the quarter was up.

Remember last year we were behind on where we wanted to be; so some of it is, I would call it an easy comparison, because we were behind on inventory.

This year we did a much better job of building, and we also had a bunch of new stores.

So a lot of times when you look, when we are in a build mode, if we get a car done and salable we make it salable in the store that finished it.

So some stores have elevated inventory in anticipation of a store opening when we ship the cars over to the new store.

So if you look at our total sales increase for the quarter, I think it was 12%; and you would expect inventory to go up commensurate with that number.

Then we had another during the quarter 7% of comps.

I know inventory is slightly higher than when you add those two things together, but that I think is more of a reflection of we were a little behind where we wanted to be last year.

And then your second question?

Just on the CapEx side, just understanding the step-up year-over-year in CapEx spend, how much is related to the new store openings increasing versus remodels, and the major buckets of spend in the $360 million.

Yes, the major buckets in the $360 million, roughly $80 million of it would be on existing stores; $40 million of that would be in normal maintenance; and the other $40 million would be in the remodels that we talked about it.

All of the rest goes towards new stores.

Remember, CapEx is always our best guess at the year.

We have a lot of movement and a lot of timing during the year, particularly in new stores and new construction.

So that is our best guess at what we will spend this year, and that is roughly the breakdown.

Great.

Thank you.

We have no further questions in queue at this time.

I would like to turn the conference back over to our presenters.

Thank you very much.

Thanks, everyone, for joining us today.

We appreciate your continued support.

And of course thanks to all of our more than 20,000 CarMax Associates all over the country for all they do every day to make CarMax such a success.

Thank you, guys.

Talk to you next quarter.

Thank you for your participation.

This does conclude today's conference call, and you may now disconnect.