車美仕 (KMX) 2016 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Q3 FY16 earnings conference call.

(Operator Instructions)

Thank you.

Ms. Katharine Kenny, you may begin your conference.

Thank you, and thank you for joining our 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.

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 28, 2015 filed with the SEC.

Before I turn the call over to Tom, I would like to mention that our next regularly scheduled Richmond home office analyst day will take place on January 20.

If you're interested in attending, please let us know.

(Caller Instructions)

Thank you.

Tom?

Thank you, Katharine.

Good morning, everyone, and thanks for joining us.

As you saw, we had a challenging third quarter, due primarily to slightly negative used unit comps.

Here are some of the key highlights for the quarter.

Used unit comps decreased by 0.8%, while total used units grew by 3.2%.

Gross profit per used unit of $2,160 was in line with gross profit per unit of $2,172 in the third quarter of last year, and total wholesale units grew 3.4%, about the same rate as total retail units.

Gross profit for wholesale unit grew by $22 to $949 per car sold.

CAF income also grew 3% to approximately $92 million.

I'll turn it over to Tom Reedy to talk about finance.

Tom?

Thanks, Tom.

Good morning, everybody.

As Tom mentioned, CAF income grew by 3% compared to third quarter FY15 and average managed receivables grew by 15%, to $9.3 billion.

The weighted average contract rate charged to customers was 7.3%, up somewhat from last year's third quarter of 7%.

Our total interest margin declined to 6% of average managed receivables from 6.4% in the third quarter of last year and 6.2% last quarter.

We saw some tick-up in charge-offs during the quarter, which resulted in a modest increase in loss provision.

However, at $91 million, our ending allowance for loan losses was 0.97% of managed receivables, consistent with last year's third quarter at 0.98%.

CAF net penetration was 42.9% compared with 41.8% in last year's third quarter; the increase reflects a mix shift towards higher credit applications in the stores.

The percent of CAF penetration attributable to our sub-prime test was unchanged at about 0.5%.

Net loan dollars originated in the quarter rose 6% year-over-year to $1.2 billion, due to a combination of CarMax unit sales growth and a higher penetration.

As you saw in the press release, Tier 3 financing as a percent of sales was 150 basis points lower than in the third quarter of FY15.

This decrease was primarily due to the mix shift I mentioned with regard to CAF penetration.

In Q3, we experienced a year-over-year decline in the number of credit applications across the lower end of credit, but moderate growth at the higher end.

During the third quarter, we repurchased 7.7 million shares for about $446 million.

We ended the quarter at the low end of our target range for leverage, which is book debt-to-capital after backing out the notes and receivables associated with non-recourse securitizations of 35% to 45%.

Going forward, we expect to continue using share repurchase as a means of managing capital structure and returning value to shareholders.

Tom?

Thank you.

As a percentage of our sales mix this quarter, zero- to four-year-old cars increased to approximately 81% compared to 75% in the third quarter of last year and 79% in the second quarter.

SUVs and trucks as a percentage of sales were 23%, down from 25% in last year's third quarter, but up slightly from 22% in the second quarter.

Our lower used unit comps were primarily a result of modestly lower traffic in our stores, partially offset by better conversion.

Total web traffic increased by 7% compared to the same period last year.

We believe our comps may have been impacted by several factors of note this quarter.

First, we've seen a decrease in the supply of 5 to 10-year-old cars, as you would expect.

Second, we've seen very aggressive promotions and lease offerings from new vehicles that appear to be pressuring sales of zero- and 1-year-old cars.

Full sale prices of trucks and SUVs have increased, so some don't represent a good value for our customers.

As Tom mentioned, Tier 3 was down about 150 basis points due to lower credit applications.

Despite these factors, we still sold over 154,000 cars during the quarter, which is the most ever in a third quarter for the Company and our average store during the quarter sold 340 cars.

SG&A for the third quarter increased about 7% to $338 million.

Contributing to this growth was the 10% increase in our store base since the beginning of the third quarter of last year, partially offset by a decrease of $6.5 million in share-based compensation expense.

In addition, our advertising expense grew by about $9 million year-over-year, reflecting the timing of expenses related to our new ad campaign.

During the third quarter, we opened two stores in existing markets: our sixth store in Houston, and our second store in Minneapolis.

We also relocated our Rockville, Maryland store to its new larger location in Gaithersburg, and after the end of the quarter, we entered the Boston market with the opening of two stores in Danvers and Norwood.

With that, operator, we will open it up for questions.

(Operator Instructions)

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

Thanks a lot, and good morning.

My first question relates to SUVs.

I knew you guys were down about 200 basis points year-on-year.

Do you have a sense for what the used market is doing for SUV mix in general?

In other words, do you think used market sales of SUVs -- do you think the mix of SUVs for the market is down?

Is it flat?

Is it up?

Are you differing in the way you're indexing in SUVs versus your broader competition?

I'm not sure versus the broader competition, Matt, but we were up a point compared to the second quarter.

We still sold a lot of trucks and SUVs in the quarter, 23% of our total sales, but as I mentioned, prices were pretty high during the quarter and, as you know, we buy a lot of cars at the auction and our buyers are trying to make sure we always deliver a great value to our customers.

So there are times during the quarter when we just didn't think it was worth overpaying at the expense of giving a great value to the consumer, but I think this is probably short-lived.

Obviously, it's been driven by low gas prices.

We've seen bigger increases in new car sales as it relates to SUVs and trucks compared to the used car market increases, but ultimately these cars will all come back into the market at some point.

And then my follow-up, very briefly, the advertising dollar shift into Q3, was that out of Q2 or out of Q4?

Really, we just wanted to point out that we launched a new campaign during the quarter and that this just -- it wouldn't be a typical increase for us in terms of our quarter-over-quarter expense, given the sales level that we had.

So we weren't really trying to say it came from one place or the other, just this is not what you would expect typically from us on a year-over-year basis.

We did create and launch a new campaign during the quarter that started in September.

And how do you guys feel that campaign went as you measure.

Given where the sales were, as you measure the return on that ad campaign -- I know it's a bit early to judge -- but your own evaluation?

Yes, it's very early to judge, particularly when you have a new broadcast campaign.

It's mostly around brand building and not necessarily for short-term sales gain.

You guys know we're not promotional.

We don't have sales so most of our campaigns are long-term brand building.

Got it.

Thanks.

Thank you, Matt.

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

Hi, good morning and thanks for taking my question.

First, my first question is just basically a follow-up to what Matt asked, but Tom, thanks for laying out some of the extra color there with regard to sales in the quarter.

But how do we think about, if we take those individually, how do we think about the trajectory from here?

It seems [as the] comments you made that some of those factors will begin to abate here, but maybe a little more color on that as to how we should think about these factors going into the balance of this fiscal year and into 2016?

It's very difficult to attribute a number of points to each of the factors.

They are just all things that we noted during the quarter.

We also had our toughest comparison of the year, which I didn't mention, and our two-year stack comp in the third quarter was actually higher than it was in the second quarter.

But each of these things had a little bit of an impact on our ability to deliver during the quarter.

Most of them, I think, are short-lived.

It's very difficult to predict trends and when things are going to change and supply, but we've done a really nice job over the last several years of being able to adjust and adapt to changing trends in the used car marketplace.

We'll do the same here.

I just thought those were things we should have pointed out during the quarter.

A lot of the supply stuff is going to take care of itself over time and we're going to take advantage of the things that present themselves to us.

Got it.

So maybe a follow-up to that.

There's a lot of commentary out there about new competitors coming into your marketplace.

Have you seen anything new with respect to your stores that may compete more directly with some of this new competition?

It's an ever-changing marketplace.

A lot of the stuff we've seen is around digital capabilities, which we're working really hard to continue to increase for our customers.

As I mentioned, remember, our average store sold 340 cars a month during the quarter.

If you look at industry data, the average new car dealer sells about 50 cars a month.

So it's really hard to say that we're losing ground and a lot of the stuff that you read about from new competition are very small players in very limited markets.

So it's not likely that we're seeing an impact across the nation for our 153 stores when a lot of the press you see is around very small players in limited markets.

Got it.

Thanks, and best of luck for the balance of the year.

Thanks, Brian Nagel (laughter).

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

Hi, good morning.

My first question is pretty easy.

I did not see any quantification of the ad spend, the launch and how much of that might have been incremental.

Tom, do you have any color you could provide on that?

We did not quantify it, but of the $9 million difference year-over-year, the majority of it was around the new launch.

Okay, and then obviously, you have seen many cycles in terms of how the wholesale market adjusts to maybe supply/demand anomalies.

On this whole conversation around SUVs, could you provide some historical perspective perhaps about anomalies you might have seen in the past and how long a correction might take in the pricing in the wholesale market?

I could probably comment on some anomalies in the past, but in terms of how long a correction takes, there's too many macro factors involved.

But we're seeing, as you -- the highest SAR we've ever seen and the bigger of the increase in the SAR is related to trucks and SUVs.

If I was thinking about that over a long period of time, that means a couple years from now we'll see lots of trucks and SUVs out in the wholesale market, which, if there's demand, then we'll be able to take advantage of that and buy and sell them.

The other big variable that's impossible to predict is, first, gas prices and then, second, the impact of gas prices.

I know you remember back in the spring of 2008 when gas hit $4, nobody would buy an SUV of any kind, but in October of that same year, gas was below $2 and things went back to where they were.

Since then, when we've seen gas prices increase, we haven't seen the same knee-jerk reaction that we saw.

So gas prices have been pretty low for a while and it has provided a boost for trucks and SUVs, but it's really hard to say what will happen going forward.

I just think our model is best equipped to take advantage of whatever the market brings.

And I know I'm violating--

We're not beholden to any manufacturer or any type of product and we want to sell whatever the customer wants to buy.

I want to violate Katharine's two-question rule.

Just one last follow-up.

Is what you're seeing right now, would you characterize as the normal ebbs and flows that you've seen in the market over time, or is there anything that gives you longer-term, more fundamental concerns?

We don't see anything that causes us long-term concerns.

Okay, great.

Thank you.

Thank you, Sharon.

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

Good morning.

Thanks for taking my questions, as well.

I know it's early, but you did just enter the Boston market and I'm curious if you've seen any or had any surprises as you entered that market?

We've been open for less than a week (laughter), so I really couldn't -- I'm not going to comment.

Even from a staffing standpoint?

You're able to staff the different types of positions you need?

We were able to staff.

I will say Boston was a bit challenging with staffing, but our teams did a great job of finding a bunch of really great people and we're very excited about our go-forward there.

And then in terms of technology, could you cover, Tom, your priorities for the next 12 months in terms of digital and technology initiatives?

Our priorities are somewhat unchanged.

We want to keep making sure that our customers have a great experience regardless of how they interact with CarMax.

It could be from a desktop, it could be from a mobile device, a tablet, or in the store.

We are very focused on making the transition from their digital experience to the store simple and seamless so that they -- the experience they have online matches up with the experience that they have in the store.

We are also pushing real hard over the next 12 months or so to make sure that our store teams are equipped with information that's available regarding the individual customers to try to make their experience more personalized.

We have a very big database of customers and we're working to make sure that we can access that information and that our associates in the store can access the information when the customers arrive.

Great.

Thank you.

And also, we want to just keep increasing capabilities of customers if they want to do more and more of the transaction online.

Thank you.

Thank you.

Your next question comes from the line of John Murphy of Bank of America.

Good morning, guys.

Just a first question.

Tom, as we think about these tougher comps, basically we're looking at multi-decade lows in the zero- to five-year-old portion of the fleet in absolute terms, and certainly 30-plus-year lows as far as the percentage of the total population of cars outstanding.

As we see that zero- to five-year-old bucket grow in the next one, two, or three years, don't you just naturally -- wouldn't you just naturally expect your same-store sales to recover as that addressable market recovers and the pressure we're seeing here is just a function of the supply?

I expect us to be able to comp our stores over a long period of time and there's lots of external factors that either help or hurt.

I've always felt like the supply of zero- to five-year-old cars increasing is good for us.

It's an area where, on a market share basis, if you look at an individual year-to-year basis, we have -- it's been our sweet spot, so I agree.

As the supply increases there, I think we'll do better in those segments.

What I feel even -- what I also feel good about is, coming out of the recession, we did a really good job of figuring out how to sell older cars, as well and I feel like we can do both.

So you look at the CarMax consumer offer in its zero- to 10-year-old cars and we're pretty good across the spectrum at near-new cars and then older cars with higher miles.

I don't think anybody does as good a job reconditioning as we do.

I don't think anybody's in a better position to take advantage of those sales as we are.

Okay, and then just a follow-up on the second question.

When you look at the gap of new versus used pricing and then you look at the financing offerings that are at --in the new vehicle dealers for new vehicles, it just seems like it's very compelling for a zero to five or even a zero to ten consumer to trip into buying a new vehicle.

If you look at a zero- to five-year-old car, basically the gap on a monthly payment base is $150 or actually potentially significantly less depending on what kind of financing they get at the new vehicle dealership.

How do you fight that tide?

Do you think you just need that supply plus pricing to come down to create a wider gap to drive those consumers back into used vehicles?

Because it's incredibly tight right now.

I'm just trying to understand how that dynamic might change and if there's anything you can do to help change it?

Well, it's not like this hasn't happened before.

There are always pockets or segments of near-new cars that, given incentive environment, whether it's through cash back or leasing, often times consumers will make that decision.

It doesn't mean they won't come back to us three or four or five years later when they are buying something different.

I do want to point out our average car is around $20,000 and the average new car is around $33,000, so the difference on average has not come down at all.

In fact, it's widened.

But it's always true that at any given point in time, given -- depending on the incentive environment, that there are some close calls there.

It was especially true this quarter.

That's why I pointed it out.

Great.

Thank you very much.

All right.

Thank you.

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

Good morning.

Thanks for taking my question.

Just another follow-up on the trends you're seeing in the new cycle.

Quite frankly, you've lived through a lot of obstacles and a lot of other headwinds over the last 20 years.

Doesn't seem like there's anything you can't weather, but it seems like this time might be a little different, particularly among the domestic manufacturers, given the propensity to lease.

Is there a higher likelihood that some of these new vehicles that are selling on the SUV and truck side go back to dealers rather than hitting the auction market and could that limit your availability of supply in the coming years?

Or is that something that you have considered and aren't really worried about?

Well, it's something we've lived through before in terms of percent of new car sales that are leased.

The number now is around 30%.

It's been this high at times before.

Generally, what that means is two, three years down the road, those cars will come back to the market in a more organized way and dealers won't be able to absorb the volume that comes back and a lot of those cars end up at auction.

That's what's happened historically and we've been able to take advantage of that in the past.

I never look at a high lease environment as a negative for us when you think about supply two or three years later.

If you think about the cycle of people getting out of a new car, if it remains that people get out of their car every three to five years, it really doesn't make any difference whether it comes back through a lease channel or it comes back as an individual car.

Eventually, they end up in the open marketplace and we have an opportunity to buy them.

Got it.

That ties with your 340 cars per month comment versus 50 per month average that you made earlier.

There's not a capacity for the dealers to handle the off-lease so I appreciate that color.

Then a quick follow-up on the credit market, now that we've finally seen a rate increase.

If you look over the last few CAF securitizations, it appears as though the spread might be stabilizing.

But really wanted to get an update there as to what you think.

If we are near that stabilization point or even now that rates are up optically, consumers are expecting higher rates, does that allow you now to increase the APR and maybe even see that spread expand in the near term?

Thanks.

Yes, this is Tom.

As far as the spread to the customer goes, that's really going to be market-dependent, as we've said in the past.

Our first goal of CarMax auto finance is to provide a competitive offer to the customer and we will go where the market dictates we go.

That said, we're constantly testing both up and down to make sure we're optimizing CarMax sales and CAF income at the same time.

We have seen a little bit of cost of funds increase this year.

We have been testing rates upward a little bit, but I really can't give you any forward-looking theory on where that spread will go because it's going to be market-rate based.

Historically, as rates have come up, we've been a little bit, as the market has, slower to adjust upward because rates tend to be sticky.

Conversely, when rates have been coming down, you're usually a little slow to adjust downward because the market is going to drive that as well and you see a little bit of a benefit.

But as far as going forward, the market will tell.

Now that the fed has given some guidance about where they are going with interest rates, that stabilized things from the perspective of spreads in the asset-backed market.

We saw our spreads gap up in the last deal versus prior deals even though we're in a lower interest rate environment, but some of that was uncertainty around what the fed was going to do.

Got it.

Thank you again.

Best of luck in the remaining quarter.

Thanks a lot.

Your next question comes from the line of Lyn Walther of Wells Fargo.

Hi.

Thanks for taking my question.

Just regarding traffic, can you talk about, was that consistent throughout the quarter?

Any regions that you saw more impact than others?

We don't give regional or quarterly differences.

I said what it was for the quarter and that's all the information we give.

Okay.

Let me just ask one other one then, if that's okay.

Just following up on your digital capabilities that you're talking about adding, how should we think about the kind of investments required to bring those up to what you're talking about?

Well, a lot of the investment can be done within our normal spend over the course of a year.

We have a pretty significant spend in both IT and marketing and a lot of the investments that we'll be making can go over that normal course.

But we are looking forward at what types of bigger investments might we need to make and when we have something to talk about there, we'll let everyone know.

Thank you.

Thank you.

Your next question comes from the line of Irina Hodakovsky of KeyBanc.

Thank you.

Good morning, everyone.

Two questions for you.

The lower floor plan -- lower traffic that you called out in your release, what do you think are the drivers?

Is it the lack of the SUVs and trucks you pointed out as a difficult supply right now?

Or is it perhaps competition and new entrants into the market who are competing in the stand-alone used vehicle stores?

It's really hard to say, but I do want to point out, we did get enough traffic to sell 340 cars a month per store and it was only slightly down and then conversion was slightly up and we ended up where we ended up.

But in terms of traffic through the door, there's a chance that customers are being more prepared and are more likely to buy when they show up.

For us, if we could get traffic that's more prepared and more likely to buy, that's just as good for us as it is if we just got plain old extra traffic.

So it's not as easy an answer as you might think but we had a lot of traffic in our stores during the quarter.

Okay.

Thank you.

And one more--

Just slightly down [from] last year.

And the second question for you.

You mentioned in your opening remarks, one of the headwinds and an impact in the comps was the lower supply of zero- to five-year-old cars.

Is that as in general what we've been hearing or are you seeing an actual sequential pullback in this supply from, let's say, in the second or the first quarter?

Actually, when I mentioned supply, I said the supply was down in five- to ten-year-old cars, not zero to five.

In five- to ten-year-old cars, it makes sense since the SAR that you're building off of in years six, seven, or eight was dramatically lower than the SAR is today.

Remember, we had a SAR as low as 10 in September of 2008 so I was referencing the supply of older cars.

Thank you for that clarification.

Thank you very much.

Thank you.

Your next question comes from the line of Michael Montani of Evercore.

Hey, guys.

Good morning.

I wanted to ask about, if you could just talk us through how you think about managing the business in terms of balancing inventory turns with gross profit dollars per unit.

Generally speaking, some of the publicly traded dealer peers have shown a little bit higher used unit comps, but then have also shown greater erosions in terms of GPUs.

So just trying to think through how you would run the business and any tests you may have had tweaking either of those two elements?

We've talked about this in the past.

We run pricing tests on a pretty regular basis.

You can also see we've been very consistent with the margins that we've been able to achieve.

So, look, there's no way to go back and say, look, what if we had lowered prices, how many more cars would we have sold.

My guess is we probably gave up a little bit of share by maintaining our prices during the quarter, but it's impossible to quantify.

I don't think, however, that we gave up gross margin dollars, and I don't think that we -- we try to make the decision that's in the best interest of our shareholders each and every quarter.

We did see the decline in margins that some of the other publicly traded auto retailers reported ending September and it maybe helped their comps a little bit, but as far as we're concerned, we can only make the best decision we can with the information that we have and that's what we did during the quarter and we're okay with the results.

Okay.

Then if I could just follow up on one, which is the leverage point.

I believe in the past you've said 4% to 5% being the comp that you would need to show leverage.

Obviously, the commentary today is that there's no change to the outlook for future year store growth.

Should we assume that's the same because I know there's a lot of initiatives that you guys are working on in terms of costs to try and improve that as well?

We've always said mid-single-digits.

We've never really put an exact number on it.

It's also dependent on the rate of growth during any given quarter.

It's also dependent on the type of growth during the quarter; opening up a big metro market is more expensive than opening up smaller stores, and as you saw during this quarter, there's occasionally some timing of expenses that's going to impact it.

But if you think about it over a long period of time, with the growth plan that we have publicly announced, mid-single-digits or so, we can leverage our SG&A dollars.

Thank you.

Thank you.

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

Good morning, Tom.

Just getting back to the SUV, light truck mix, if we look at the total industry sales 2012 through 2014, about 50% of total sales were light truck, so call it SUVs and pickups.

Your sales and inventory mix clearly is much less.

So are you seeing just -- are you not seeing that many of those vehicles available for sale or is it they are maybe not in the condition that you want to re-retail?

There seems to be a disconnect there?

Did you say 50% -- I didn't hear what you said about the mix.

Did you say 50%?

50% of all vehicles sold from 2012 to 2014 were light -- classified as light trucks so SUVs and pickups basically.

I hadn't heard that number before, but I believe you, but that's never been the case for us.

We've always been in the mid-20s%.

This isn't--.

It's not the same metric.

Hold on a second.

His metric included cross-over -- it's a much broader--

I'm sorry.

Ours is just light trucks -- medium and large SUVs.

Our 23% is medium and large SUVs and pickup trucks.

The 50% includes crossovers and smaller SUVs so that's not in our number.

I don't have the number handy to tell you what the mix was.

In general, over time, we're going to look a lot like the industry looks.

Our sample is very large.

We're very widespread across the country and in general we're going to look like the industry looks over time.

That's where our supply comes from.

We're going to match up with consumer demand.

It's never going to be exact, particularly on a quarter-to-quarter basis.

But if you look at what we have historically reported in trucks and SUVs, it's generally been in the mid-20%s, sometimes high 20%s.

This quarter it was 23%.

It was up a point from the time before, remembering that we're talking about two different measures.

Okay.

Got it.

Do you feel like maybe you're missing some opportunity then with the SUVs, or not necessarily?

Well, as I said, during the quarter there was a chance that we could have paid more.

It's not like the cars weren't out there, but we're always trying to deliver a great value to the consumer, as well.

So there are always times when certain things at the auction, we just think they are too expensive and we don't want to buy them and then turn around and resell them, so we wait.

The same thing is true here.

We've been around a long time.

We've seen cycles go up and cycles go down.

As I mentioned earlier, who knows what happens with gas prices.

You hit a big spike in gas prices and there's a good chance our SUV mix would go up during that time because those cars would be cheaper and be a better value to our customers.

But I did mention it.

During the quarter, we saw that there was a lot of pressure on SUV pricing.

Got it.

Okay.

That makes sense.

If I could just sneak one quick one in.

Extended protection plan revenues lag vehicle sales a little bit.

Anything to call out there?

Nothing in particular.

In general, we would expect that business to grow with unit sales.

This quarter we had some adjustments in the return reserve.

Remember, that's $100 million-plus reserve and so we're going to see small movements in that based on experience as we see it, as it goes forward.

Nothing really exciting to report.

It's just an adjustment.

Okay.

Thank you.

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

This is Nick Zangler in for Rick.

I was wondering, are you guys considering any changes in the policy of selling recalled vehicles?

Obviously, one of the larger dealer groups ceased those sales to enhance their brand name and obviously you guys have a very strong brand name.

But any thoughts there?

And in general, how do recalled cars affect you operationally?

We talked about this on the last call.

Remember, we don't have -- we're not authorized to repair recalls at our stores, and obviously the recall environment has changed over the last several years.

We think the most important thing is being completely transparent with our customers and making sure they are fully informed.

And also that they register on the manufacturer's website because we could sell them a car today and a recall could come out next week and it wouldn't have mattered whether or not we did anything to the car.

We think it's very important that they are notified.

We're the only car retailer that has a direct link to the NHTSA website and it's VIN-specific and we prepopulate the VIN, so any customer that's on the CarMax website can look up any -- all recall information on each and every individual car.

Then during the sales process, we make sure that we point out to every customer the recall status.

We help them register with the manufacturer, and historically, the relationship, as it relates to recalls, is between the manufacturer and the customer who owns the car.

And we want to make sure that customers are fully informed and get that information going forward.

So our policy is 100% transparency as it relates to recalls.

Right, right.

Understood.

Then just in general, where do you guys stand with third-party lead generators?

What was the proportion of sales through those sites in the quarter?

We've never talked about proportion of sales, but we've been asked about cars.com and autotrader.com and we have not used those sites for a long time.

All right.

Thank you very much, guys.

Appreciate it.

Your next question comes from the line of John Healy of Northcoast Research.

Let's go to the next one, operator.

Okay.

Your next question comes from the line of David Whiston of Morningstar.

Thanks, good morning.

Wanted to go back to the distinction between SUVs and crossovers.

In the crossover side, for vehicles like a RAV-4, CR-V, Chevy Equinox, can you talk a little bit about what pricing you're seeing at auction for those vehicles?

I don't have that information handy, but those are good sellers for us.

But I don't have the mix in front of me.

I'm sorry.

What I'm basically asking, are you having any inventory issues there?

It sounds like similar to what you were talking about with SUVs.

Is that an issue at all?

I don't think so.

Okay.

And Tom Reedy, you mentioned before Q&A that you're on the low end of your leverage.

Can we infer that you're not going to pay back the incremental revolver borrowing any time soon?

That's fair to say.

The revolver balance is going to be something that's quite seasonal.

As you know, we buy up inventory pretty significantly in the fall and we sell through it in the winter and into the spring, so it's there to manage liquidity.

But as I mentioned, we've got a target range of leverage we would like to manage to.

I would expect us to keep adding debt as we go forward and buying back stock to manage to that level.

It wouldn't be out of the question for us to do something -- if you think about the revolver -- you look at our conduit facilities on the asset-backed side -- it's something we can use to manage liquidity, but then when you get a critical mass, you take it out with a longer-term instrument.

Okay.

Thank you.

Your next question comes from the line of Paresh Jain of Morgan Stanley.

Good morning, everyone.

I just wanted to follow up on Mike's question earlier.

If I'm hearing you right, stable GPU seems to be the more important metric here for CarMax.

Am I thinking about it right or how would you characterize your most important metric?

Is it comp or is it GPU?

Our most important metric is sales.

And then we've just been able to manage gross profit per unit very consistently over time.

We want to make sure that we're giving our consumers a great value.

One of the things that we are very focused on is continuing to aggressively manage our costs because the price to the consumer is not just the margin, but also the cost that we put into a car during the reconditioning process.

We continue to put enormous efforts around the engineering that we -- we have turned our reconditioning process into an engineering process and we want to continue to try to figure out how to lower our costs so we can still deliver a great price to the consumer and maintain our margin so that we're delivering a good return for our shareholders.

Understood.

Then on a more strategic front, I wanted to talk about dealer partnerships with ride- and car-sharing businesses.

We see some of these businesses -- big and small -- looking to partner with dealers on two fronts, either to buy or sell a car, or in some cases, just utilize a used car sitting on dealer lots and pay dealers a fee.

How do you feel about these partnerships between ride-sharing firms and dealer businesses?

Are there potential hurdles in this type of arrangement or maybe there are no issues and it makes sense to use money on used cars while it's sitting on the lot?

We haven't really explored those avenues for us.

The one thing I would say is it is an incredibly fragmented business and a huge marketplace.

There are over 40 million used cars sold annually in the US.

We're a very small fraction of that.

So as I said, we haven't looked at those things in particular, but we try to pay attention to all the things that are available in the marketplace and see if we think they are an opportunity for us.

But right now, our biggest opportunity is to continue to grow the business in markets that we're not in, continue to add stores back into places where we already have a presence.

We're only reaching about 60% of the US population.

We have incredible growth in front of us, and right now those are the kinds of things that we're focused on.

Got it.

Thank you.

Your next question comes from the line of Robert Iannarone of RBC Markets.

Hi, guys.

Rob Iannarone on for Scot Ciccarelli.

Just a couple of quick questions for you.

Some of the credit data that we've tracked has indicated outsized burden with 72-month plus financing arm.

Just wondering if you could give us any commentary on what you're seeing in customer behavior and their desire for longer-term loans for their vehicles?

Yes, the way I can respond to that is that, like I said, we're going to be a market-driven lender at CAF and we're going to make sure we're doing the best thing for our customers.

It's always a balancing act.

We're going to be continually testing and see when it makes sense.

Recent -- the data that you might be pointing to, recent Experian data shows about 15% of used volumes getting done at terms longer than 72.

We're not sure how much of that is actually pushing out more than a couple months, but as I said, we'll stay competitive.

If we see the need to move, we will, but at this point, we don't feel compelled to rush into any long-term financing.

Great, thanks.

Just one more on advertising.

Second quarter in a row now, we've seen advertising expense tick up.

You've certainly commented on this in the last couple of calls for us.

Just wondering if we should expect that to normalize going forward now that you are in the Boston market and you've launched this new campaign?

Yes, we're going to make decisions throughout the quarter, as well, but as I said, this increase on a quarter-over-quarter basis would not be typical for us.

Okay.

Thank you.

Thank you.

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

Thanks a lot.

I got back in line and there was room.

I have two follow-ups for you.

The first relates to write-downs.

What can you talk about in terms of the drivers of the tick-up and write-downs?

How would you relate it to underwriting standards?

You talked about seeing higher quality credit applications, et cetera.

Just give us a sense, if you could, about how to think about those write-downs and how we might model them out from here?

Are you talking about CAF losses?

Correct?

I'm sorry, Matt.

Yes, what I mentioned about the flows in the quarter was that it was a quarterly -- this quarter phenomenon.

For the last several, several, several quarters, in fact, most of them we've seen growth in all areas in the credit spectrum.

This quarter, we saw decline in application volume in lower FICO stuff and a continued growth in the higher-end stuff, the 650-plus.

That's what I meant by the traffic.

That's unrelated to what's going on with charge-offs.

Charge-offs has to do what's in the portfolio and what's been put in there over the last several years.

The way I characterize it is we've had a long string of favorable experience.

At some point, it was -- the tide was going to turn and things were probably going to normalize.

I would probably characterize it as giving back some of the favorable experience we've had over the last several quarters.

It's too early to tell what that means from a go-forward perspective, but as I mentioned, the reserve balance today is at the same level as a percent of receivables as it was last year.

Is there anything that you saw in recent delinquency data that would lead you to be incrementally concerned or do you feel like the book is still in very good shape?

As I said, we've got a quarter's worth of data and we'll take it as it comes.

Got it.

Then my next question, just you bought back an awful lot of stock during what was obviously a tough quarter.

What would you need to see?

What would it take in terms of the fundamentals of the business to lead you to slow that buyback down?

Matt, as I said, we've got into the lower end of the leverage range that we've been targeting, and on a go-forward basis we'll continue to do it to manage the capital structure going forward.

I can't comment on what would compel us to do anything, because market conditions could be -- in the future could be all over the Board.

I just think you should take away that we're going to continue using it.

We're going to continue using a programmatic approach.

You saw during the quarter that we stepped up volume based on what the stock price did.

But on a go-forward basis, it's probably more of managing the structure perspective rather than moving to a new capital structure.

Got it.

Thank you very much.

Thanks, Matt.

All right.

There are no more calls.

I want to thank everybody for your interest in CarMax, and of course, I want to thank all of our more than 22,000 CarMax associates for all they do every day to make CarMax a success and a great place to work.

Happy holidays to everyone.

Thanks for joining us.

Bye.

This concludes today's call.

You may now disconnect.