車美仕 (KMX) 2018 Q3 法說會逐字稿

Good morning. My name is Denise, and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax FY 2018 Third Quarter Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to Katharine Kenny, Vice President, Investor Relations.

Thank you. And good morning, everyone. Thank you for joining our fiscal 2018 third quarter earnings conference call. On the call today as usual, are Bill Nash, our President and Chief Executive Officer; and Tom Reedy, our Executive Vice President and CFO. Before we begin, as usual, 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 can affect these expectations, please see the company's annual report on Form 10-K for the fiscal year ended February 28, 2017, filed with the SEC. (Operator Instructions) Bill?

Thank you, Katharine. And good morning, everyone. As usual, I'll start off by talking about our quarterly results, then I'll turn the call over to Tom to review financing, then I'll update you on our initiatives. Our used unit's comps for the third quarter increased by 2.7% and total used units grew by 8.2%. Used unit comps were driven by the effects of Hurricanes Harvey and Irma along with higher conversion in our stores partially offset by lower traffic. Excluding the hurricane impact, comps for the quarter would have been essentially flat. Our website traffic grew in the third quarter by 19%. This is a result of the continued investment in our online customer experience, including SEO and additional functionality. Gross profit for used unit, once again, remained consistent at $2,148 compared to $2,155 in the third quarter of last year. Our wholesale units grew more than 9% year-over-year in the third quarter. In addition to the expansion of our store base, this growth was supported by the favorable depreciation environment we saw through most of the quarter. As a result, we were able to provide seasonally strong appraisal offers, which we believe led to a higher overall buy rate. Gross profit per wholesale unit also increased this quarter to $933 compared to $900 in last year's third quarter. Again, we believe this was largely due to the more favorable depreciation environment. Before turning the call over to Tom, let me cover our sales mix, SG&A, and store openings. As a percentage of our sales mix, 0- to-4-year-old vehicles increased to 81% versus 78% in last year's third quarter. As a percent of sales, large and medium SUVs and trucks was 26%, which is down somewhat from the second quarter but similar to last year's third quarter. On SG&A, expenses for the quarter increased about 12% to $400 million. This represents a year-over-year increase of $81 per unit in SG&A. Several factors impacted SG&A growth, including the opening of 21 stores since the beginning of the third quarter of last year, which represents a 13% growth in our base and an increase of $8 million or $42 per unit, approximately half due to higher share-based compensation expense and half related to our accrual for incentive pay. Remember last year, there was no accrual in the third quarter. As we've previously discussed, we continue to invest heavily in technology and digital initiatives to improve the customer and associate experience. Lastly, during the third quarter, we opened 5 stores. One in the new market in Tyler, Texas, and 4 others in existing markets, including Philadelphia, Las Vegas, San Francisco and Seattle. In the fourth quarter, we will open 4 stores. Two are in new markets for us: Myrtle Beach, South Carolina, which opened earlier this month in Portland, Maine. The other 2 will be in our existing markets of Boston and Denver.

Now I'll turn the call over to Tom.

Thanks, Bill. Good morning, everyone. With regard to sales mix by finance channel, CAF net penetration decreased modestly to 44.2% compared to 45% in last year's third quarter. Tier 2 represented 15.4% of sales compared to 17% in last year's third quarter. Tier 3 from third parties grew to 10.8% of used unit sales compared to 9.7% last year. And similar to prior periods, this year, sales where customers paid cash or brought their own financing also increased relative to last year's third quarter. The allocation sales across our lending channels was for the most part driven by the mix of credit applications. We continued to see growth in applications across the credit spectrum. It was more pronounced at the higher and lower ends. Also we did observe some weakness from one of our lenders in the Tier 2 space. For CAF, net loans originated in the quarter rose 8.6% year-over-year to $1.5 billion. This was due to CarMax's sales growth and an increase in the average amount financed, partially offset by the lower penetration. CAF income increased 15% to $102.8 million, driven by a 10.4% growth in average managed receivables and a lower loss provision, which was partially offset by a slight compression in the portfolio interest margin. Total portfolio interest margin was 5.7% of average managed receivables compared to 5.8% in both the third quarter of last year and the second quarter of this year. For loans originated during the quarter, the weighted average contract rate charged to customers was 7.7% compared to 7.3% a year ago and 7.6% in the second quarter. The ending allowance for loan losses was $128 million or 1.11% of ending managed receivables, up slightly from 1.10% in the third quarter of last year but down sequentially from 1.15% in Q2 of this year.

Now I'll turn to corporate finance items. As you probably noticed in the release, we experienced a reduction in our effective tax rate. The tax provision was positively impacted by $8.7 million in Q3. This relates to our adoption this year of the new FASB guidance regarding share-based compensation. The new standard requires the impact of share-based award settlements to be reflected in the tax rate. Whereas before it ran through shareholders equity. We expected this would introduce volatility to our tax rate and this is the first quarter where it has been significant. In regard to capital structure, during the second quarter, we repurchased 1.5 million shares for $107 million. That's down from last quarter's pace as you would expect based on the stock price during the quarter. Before I turn the call back over to Bill, I'll comment briefly on tax reform and its anticipated impact on CarMax. Our federal tax picture is pretty straightforward, so we would expect the substantially lower corporate tax rate to benefit our financial results and cash flow in future periods. We are evaluating the magnitude of the benefit now that the legislation has been finalized and is awaiting the President's signature. Additionally, in the period of enactment, which we expect to be our fourth quarter, we will be required to revalue our deferred tax asset based on our estimated new tax rate. We believe this would result in a onetime unfavorable impact on our tax provision of an estimated $50 million to $65 million. This range could be impacted by our analysis of final law and our fourth quarter financial results.

Now I'll turn the call back over to Bill.

Thanks, Tom. Now I want to take a moment to provide you with an update on a few strategic initiatives around our innovation efforts. Specifically, developments in technology and online digital capabilities. The focus with technology is making it easier, faster and more efficient for our associates to provide an exceptional customer experience. While our legacy systems have served us well over the past 24 years, we're focused on leveraging new technology with a mobile first mindset. On the technology side, we are implementing a new enterprise-wide customer relationship management or CRM platform to develop a more seamless and personalized car buying experience. The CRM platform provides sales consultants with a unified view of our customers' shopping and selling history right at their fingertips. As we continue to evolve the platform, it will provide our sales consultants with even more visibility, including the customers online research activities. The platform is currently in 100 stores and we plan to complete the rollout to all stores by the end of the fiscal year. The rollout has been a success so far and we've received great feedback and support from our sales consultants. Another example of new technologies are mobile appraisal platform for buyers to use when preparing an offer for a customer's car. Historically, our buyers write down all the information they need to assess a vehicle and prepare the appraisal offer. With the new mobile appraisal platform, buyers use a handheld device to upload all the information in real time at the vehicle. This makes the process easier and faster and it should improve accuracy. The new technology has been well received by our buyers. We've already rolled out this capability to more than 100 stores and plan to roll it out to our remaining stores over the next several months. Regarding our digital innovations for enhancing the online customer experience, we have a few updates. This quarter, we expanded our test of an online appraisal tool to 7 stores in the Midwest. The tool allows customers to get an appraisal offer for their vehicle by submitting information online. The test is underway in a total of 10 stores now, and we're continuing to evaluate customer feedback and we'll focus on improving the product over the next quarter. We're also making significant progress with digital merchandising, which is how we showcase our vehicles on carmax.com. Last quarter, we talked about testing a new 360-degree interior photo feature. It simulates physically sitting inside the vehicle, including the ability to pan around and see everything inside and a zoom capability to see finer details. The response from customers on this offering has been highly positive and we plan to roll it out to all stores by the end of the fiscal year. Remember, our goal is to provide exceptional customer experience both online and in-stores that helps our customers find their perfect car, purchase that car and receive that car, all on their own terms. We are proud of these improvements and as we continue to make progress on other stores at goal, we're excited about the future ahead.

With that, we'll be happy to take your questions.

(Operator Instructions)

Your first question comes from Sharon Zackfia with William Blair.

I guess, a question on the non-hurricane related markets in the quarter. When you think about the slowdown in the comps that you saw, I mean, is there anything that you would attribute that to? And then kind of as a corollary now that subprime is getting a little bit better as a percent of the mix, do you expect that to be a bigger driver as we get into the higher subprime seasons in the fourth and first quarters?

Yes, so, Sharon, on the first part of the question, the slowdown in the comps in the non-impacted hurricane markets. I'd tell you, I would point to something that I talked about that was a benefit for the wholesale business, which was the depreciation environment. This was the first quarter this year where acquisition price actually went up year-over-year because we did not see the normal depreciation and I think part of the reason we didn't see the normal depreciation for this time of the year is because of the boost of the hurricane replenishment of those vehicles, which caused the overall values to hold up stronger than what they normally did. So I think that obviously, with continued pressure from new-car incentives, I think it's probably a combination of those things. And then I'm sorry, what was your second question?

Subprime Sharon?

Yes. So subprime looks like it's the second quarter that it's been improving on a year-over-year basis as a percent of the mix and seasonally, that's just a more important business as you get into tax refund season so just kind of looking for some perspective on how excited you might be that, that could be more of a driver of comps going forward?

I don't know if excited is the right word. Because we're obviously -- more concerned about the denominator and overall growth would be best for us. But I can give you a little bit of color on the subprime. As I mentioned in the prepared remarks, we saw the volume of customer applications being strong, is at the highest and lowest ends so I think at least in our system, that says that more customers at that low end are applying for credit than we've seen in the past. And another piece of the puzzle from the perspective of the subprime penetration is we have seen this quarter and some last quarters as well, an uptick in their conversion of the applications that they see meaning conversion to sale. So there's been a modest uptick in the performance of those subprime lenders. I don't know how that persists, but obviously, after a period we saw them declining several quarters ago, it's encouraging.

Your next question comes from Matt Fassler with Goldman Sachs.

Two questions. First of all a follow-up on the answer that you gave to Sharon's on the sales momentum in non-hurricane markets. And you spoke about the rising wholesale price environment and the changing depreciation dynamic. Are you suggesting that perhaps, you held back, as prices rose and would that suggest that you deliberately walked from some share for a moment in time that you thought wouldn't be profitable or do you think that the market more broadly slowed down because the new used value equation changed this quarter?

Yes, Matt, I think it's more the market dynamics to just slow down because of the depreciation environment. So it's the second part of your question.

That's helpful. And then my follow-up on the wholesale volumes, you talked about your buy rate moving up, given pricing dynamics. Do you think that you would adapt it or adapted I should say, to the pricing environment from a wholesale purchasing perspective differently? And the market in this case as well did you read it differently? Was there something that you saw that enabled you to be more aggressive or similarly was just kind of a market-wide dynamic in your view?

No I think, what you have to do is you have to think about it kind of a year-over-year basis since last year, if we see the -- saw the normal seasonal depreciation for this time of year, even though we're not speculating on where the market is going, we kind of trail the market and adjust as it goes down. We follow it down and so it puts more pressure on the margin and when your offers are going down, it impacts your buy rate. In this quarter, where you don't have the depreciation, anytime you have more of a flat depreciation market or an appreciating market, it makes a little bit easier to maintain your buy percent because you're given offers -- higher offers to consumers.

Your next question comes from Michael Montani with MN retail.

Just wanted to ask first off on a more philosophical level, but when you think about the tax reform impacts, can you share any thinking around the potential to reinvest into either sharper pricing or even further enhanced store level service versus increasing buybacks or dividends? Just trying to think about how you guys might spend that potential windfall?

Yes, Michael, we don't give guidance, we can say that as this capital materializes, we will carefully consider all of our opportunities and utilize the capital in ways that we believe will be in the best interest of the business, our associates, our customers and our shareholders. And like I said, so once it materializes, we'll be evaluating that and I think there's a lot of different opportunities we could look at.

Yes. We can add a little color to that also. If you look back at our growth plans and our history, capital availability has not been a gating factor for us and our decisions regarding growth and investing in our strategic initiatives. We're at a pace that we are at because we want to make sure that we can execute successfully on the growth and then we have the bandwidth to focus on innovation. So that's always going to play into our thinking with regard to our pace of growth and how fast we move on things as well.

That's great. And if I could just follow-up on innovation comment, there's a lot of work that you all have been doing with online financing, search engine optimization and then also home delivery test. So I guess I'm just wondering if you can just give us an update on, kind of, the latest learnings across the board and just what you're seeing out there to continue to win share?

Yes. Again, I think, we're approaching this from trying to make sure that we meet the customer on their terms so whether they want to come to the store, not come to the store, do a combination of them, in between the 2, we want to make sure that we are prepared and you hit on some of the -- when I think about online financing, that's a capability that we're allowing the customers to do. SEO, as I think about the growth like our web traffic growth, a big percent of that growth, a large percentage of that growth, is coming from non-brand SEO and SEO is something that we look at every single day and it's something that continues to be -- we'll continue to focus on every day because the search engine algorithms are changing, we've made a lot of progress there, everything from helping the search engines find our pages, making sure they can see the content on the pages, optimizing the content, adding thousands of new pages on there. SEO is going to be -- into the future, it is going to continue to, I think, provide benefits. I think there's a lot of opportunities still there. So I would say that we're going to continue to invest in all of these things. The home delivery, when I think about home delivery, it's really the capability that we've been building even though we haven't expanded the home delivery test beyond the Charlotte market, we absolutely are progressing that forward with things like online financing, with online appraisals, driving more traffic to the website. So I feel good about the pace with which we're making the change and we'll continue to invest in those digital experiences.

Your next question comes from Craig Kennison with Baird.

I'm curious if you've mapped your consumer income profile, if you will, against the revised tax brackets and the bill that the President may sign soon. And just whether you see tax reform as a catalyst for the typical CarMax consumer?

Yes, no, we haven't looked at that, Craig. And truthfully, with the bill just signing and it hasn't even -- actually it hasn't even been signed by the President, but just passing. That's something that we can certainly look at going forward. But we haven't looked at that up to this point.

And as a follow-up, in the hurricane market, are you seeing any excess traffic still or is that all subsided?

Look, I'm not going to talk specifically about traffic patterns in any one market but I will tell you is the further you get away from the actual event, the benefits wane and we've certainly seen that since the actual hurricanes.

Your next question comes from Brian Nagel with Oppenheimer.

So first question, I guess, just a follow-up on the used car sales. In recognizing that you don't give guidance but as we look into the fourth quarter, and the issue you articulated, the depreciation of pricing that seemed to be somewhat of a headwind ex hurricanes here in the fiscal third quarter. Should we -- as we look at the fourth quarter, would that remain a headwind or do you see some type of abating, would it start to fade? And then my follow-up question, I guess bigger picture. We talked a lot about the digital initiatives and you guys are obviously very focused there, but can we give analogy that these initiatives are being placed well, is there a way to quantify what impact they started to have on sales?

Okay. So Brian, on your first question. You got it right, we don't give guidance. So for the fourth quarter, but what I will tell you about the depreciation environment at the end of the third quarter, we did start to see some depreciation at the end of the third quarter. As far as the digital initiatives, I'm not going to speak specifically about any one initiative and what we think it's bringing to the bottom line. If I think about our comps, I think it is the product of a lot of things that we're working on, both the digital initiatives but also execution in the store and I can't point to one specific digital initiative that is leading to the book, the comps, it's just not that way. And I think it's a combination of all the different things that we're working on that has produced the results.

Your next question comes from Scot Ciccarelli with RBC Capital Market.

Bill, I know you guys have been asked a number of times about some of the sales cadence and sales results but one more I want to throw in there. Is there a way for you guys to estimate the magnitude of the negative impact from the rising vehicle values, maybe by tracking your monthly or even weekly cadence against the changing wholesale price environment?

Yes, there's no way to really -- to pinpoint that down. As I talked about in the opening remarks, I mean, I believe that that's absolutely having an impact. But to the degree, it's really hard to pinpoint.

Okay. Just a quick follow-up then. You did mention a negative impact from one of your Tier 2 providers. Any chance you can help size that impact? And then, is that expected to remain a drag into the following quarter?

Mike -- hey, Scot. I can't really talk about what we're going to see in the following quarter because it hasn't happened yet, but I can give you a little color -- Tier 2 and Tier 3 overall, there's a number of things that have been going on here. The volume that Tier 2 has seen has been much more flattish as I said since the growth of applications, has been more pronounced at the high end, low end. So that's playing into a little bit on the Tier 2. And then, as I did mention, we have a lender that had a significant pullback. In the Tier 2 space, we expected every lender that we're partnering with is going to bring some incremental value to the table. So if we see some weakness in one of the lenders, the incremental value that, that lender is -- has been providing is likely to trickle down to Tier 3. And see them and probably have a little bit less conversion there. So we would expect that we're feeling some impact on sales. And it's an issue that has been percolating for the last several quarters. I can't really say how long it's going to be, but the conversion in Tier 2 is down little a bit because of that and then so for a combination of the volume, the conversion in that one particular lender, I think Tier 2 is a little bit -- is weaker than it has been historically. And conversely, we've seen Tier 3 up a bit because their performance has been a little bit stronger and I think we're seeing some trickle down from Tier 2 into that space that they wouldn't have otherwise seen.

Your next question comes from Seth Basham with -- Wedbush Securities.

My first question is on web traffic. Growth accelerated there, your comps decelerated a bit. Can you speak to what you're seeing in terms of quality of that traffic growth and how online lead generation is trending?

Yes, so we're pleased once again with our website growth. If you look at individual leads, different lead types. So for example, appointments or holds, online financing, prequalifications, different lead types convert differently. So as the growth of those -- the traffic growth that we've seen, it's producing similar lead types that we saw before, but on any given quarter, the mix of which ones are coming in can change, which will, any given quarter can change the actual conversion, the overall conversion of those. I would tell you, I would much rather have that traffic coming in, have that lead coming in, because that's an area that we can or an opportunity that we can continue to execute better on. So I'm pleased with the growth. We haven't seen a real decline by lead type in conversion but it just depends on the mix of leads that are coming in.

Got it. So the biggest thing to clarify this quarter is that you had a shift in the mix of leads coming in as opposed to conversion on each individual type of lead?

That's exactly right. That's exactly right.

Your next question comes from John Healy with Northcoast Research.

I wanted to ask just a bigger picture question on store traffic. It's clear you guys are doing well with innovating the business from a technology and a customer, what I say, conversion standpoint. But is there a way or any initiatives underway to kind of maybe drive the older model of just getting people into your stores and driving the awareness of the CarMax brand? Is there anything we should expect in calendar 2018 and may be try to reinvigorate that kind of store level traffic, people coming to you because they know you in the community and know you provide a good value? Those types of shoppers?

Yes, John, I talked about this before. I'm really trying to get people to think about the business a little bit differently. Historically, we have always focused on store traffic but 9 out of 10 of the customers that buy from us, they start by hitting one of our digital properties. So the way we think about it is, not just store traffic, but web traffic, leads, quality of leads. It's really how many opportunities do you have to turn a customer -- turn someone into a customer. There may be some things that we do digitally, for example, online finance prequalification that may prevent people from coming in the stores. So, for example, somebody goes on and gets prequalified and they realize they can't get financing, and therefore, they don't come in the store, that's actually a good thing. Now that would drive store traffic down but it keeps that person from coming in the store and utilizing sales consultant's time, so we're really looking at it that how many engagement touch points do we have and how we're doing with that. So as far as specifically driving just store traffic, I think about it more holistically and think about, okay, let's start at the upper end of the funnel. Yes, and John, the other thing is, I would tell you, we still haven't -- if you think about our digital spend, if you think about advertising as a whole, we still spend the bulk of our advertising on traditional, like broadcast, TV, radio, which is really an awareness brand building. So we will continue to do that about 30% of our ad spend, I'm sorry, it's probably more in the high upper 30s of our advertising spend is more digital. And I would think that we're going to kind of maintain that mix for a while.

Fair enough. And just a follow-up question, either for Ed, Bill or Tom. When you think about tax reforms, one of the things I've been thinking about is highly competitive industries and I'm not sure necessarily where to place the used auto business in that kind of spectrum. But do you think this is an industry that holds onto that absolute profit benefit associated with tax reform or do you think it's likely that maybe over a multi-year timeframe, that -- the gross margins or the operating margins in the business kind of adjust and you don't necessarily hold onto that savings?

Yes, John, I don't know to be able to speak to the whole industry and what they're going to do with that available capital. Like I said earlier, we're going to evaluate it at the time it starts to materialize and certainly one of the things that we'll be looking at is from a competitive standpoint how are we looking. But again, that's just one of the factors that we'll be considering as this money materializes.

Your next question comes from John Murphy with Bank of America.

Actually a question sort of -- about the short-term and long-term and thinking about the used price versus the resid on lease agreements and it does seem like in the third quarter, with the relative increase in used vehicle pricing, related to expectations, that may have floated close to resid or maybe even above resid but as we go forward and receive the increase in supply, used vehicle pricing might come under pressure and those might go back below resid, so I'm just curious, I mean, there just this thesis out there that dealers will hold onto these vehicles coming back off of lease, which is what it appears to happen in the third quarter to some degree -- or in your third quarter any way. How you think about that going forward and is this temporary impact that you sort of saw in the third quarter sort of a result of this? I'm just trying to figure this stuff out.

Yes, John, I'll tell you. I think the wholesale market is very effective and very efficient and when you see something like the dynamics of the third and the demand goes down, it will quickly right itself. If dealers aren't selling vehicles, they're not going to come and buy those cars. Dealers can only hold out so long not selling cars, and not bringing cars to the auction. So what I can say is from past experience is when we have seen things like this, it eventually, because the market is efficient, it eventually turns around.

And that should ultimately result in better same-store sales comps for you or at least that's my opinion. I won't put words in your mouth.

It should -- I know, it should absolutely result in more attractive used car pricing and drive the pricing down. And of course, when we have more attractive pricing from the acquisition standpoint, we can pass that to the customers and that becomes even that much more attractive deal versus a new car.

Yes, and what we are hearing from my auction is a boat load of institutional cars waiting in the wings that were sort of skittish. Just -- and just sort of one follow-up. When we think about the SG&A factors that inflated it to, I think, up $81 per unit, you didn't cite technology spend as a sort of inflationary factor there. Are we at the point where your tech spending is sort of run rating similar year-over-year and there's no anticipation of a significant step up that would on a like-for-like basis, inflate SG&A going forward? And if anything may be it might tail off overtime?

Yes, well over time, I think the growth will -- the growth of that spend will absolutely tail off. If I think about SG&A, we had a fairly sizable increase in compensation and benefits, part of that we highlighted stock-based comp and the bonus accrual, but part of that is also the folks that are working on our strategic initiatives, they're embedded in there and the other overhead cost, that's where some of the cost are showing up. And like I've said, all along this year, this is a heavy investment for us. This is millions of dollars but what we try to do is not make it all incremental. And we -- I think, we've done a good job of reprioritizing, stopping things, repurposing people. So what I would tell you is the investment is baked in here, it's just within a couple of different break out lines on SG&A and I think it's offset by some of the things we decided not to do that aren't surrounding our initiatives. The other thing I tell you, this year is going to be a heavy investment and depending on how this year ends, I would expect next year we'll continue to invest. I talked briefly about the technology changes, we've made a lot of improvement on the customer experience side and added functionality and now we're really doubling down on the technology that gives our associates a world-class experience and as I think about those 2 things I cited about the CRM and the mobile appraisal after our buyers, I'm pleased. I mean, those are 2 things that pretty much have -- we started the rollout this year and we'll get one of them completely rolled out by the end of the year and the other one will be soon after the end of the year and that's a couple of facets of our business and we still have other facets of the business that we want to tackle as well. So we are on a little bit of a journey here.

Your next question comes from Rick Nelson with Stephens.

Like to get your view on third-party lead generators. What proportion of sales come through these lead generators and do you have an opportunity there?

Yes. So first of all, our primary focus is on our website. We're trying to get the customers come to a website. There's probably 16 million to 17 million hits coming through there. Having said that, we want to continue to use third-party generators. In the third quarter, we had vehicles on CarGurus, Edmunds, KBB, to name a few. And the way we think about those is they're complementary to our website. We also look at them constantly to make sure that it's good economic decision and what we're paying for those leads is way more than offset by the sales that we're actually getting. If I think about the digital spend that I talked earlier as part of our overall advertising, third-party lead generators or search engine marketing, that is a majority of our digital spend and we will continue to put dollars there. It'll fluctuate from quarter-to-quarter depending on how productive those third-party generators are.

Bill. I'd also like to get an update on your home delivery test, how that has progressed?

Yes so, Rick, like I said earlier, we still got the home delivery in the Charlotte market at this point, what we've been focused on is continuing to build out the capabilities that will not only enable home delivery but other ways to deliver customers, and like I said, the progress I think we are making on home delivery is by adding all this functionality. Whether it will be the mobile appraisals, whether it be the consumer prequalification on the financing. You build the capabilities, that enables not only home delivery to scale very quickly but enables may be other ways to deliver cars to customers like expedited delivery, that kind of thing. So I feel really good the progress that we are making.

Your next question comes from James Albertine with Consumer Edge.

And if I may, just very quickly say thank you, and we're going to miss Cliff and I want to wish him the best in his retirement and congratulations to Ed, [Darren] and Joe on their promotions as well.

Thanks, James.

On a long-term, sort of, strategic perspective, I think we're all sort of working off of this idea of sort of 300 to 400 stores at maturity and sort of this comp leverage point in the mid-single digits. I'm just wondering, as you're learning more and seeing more success from your digital initiatives that you could provide sort of an update on your brick-and-mortar growth strategy and whether or not you're pivoting to a lower store count over time and would hope to fill in more markets with, sort of, digital initiatives? And if that has an impact theoretically on bringing the comp leverage point down as well.

That's a great question, Jamie. So historically, we've talked in the range of the 200 to 300 and I think in one of the recent calls, I said you can pretty much tick off the 200 because we're essentially, there. I really want people to stop necessarily focusing on some certain target end range because we're continuing to learn about the business. I want people to think more about how can we continue to grow our market share? If you look at 0-to-10-year vehicles nationwide, we're only capturing about 3%. And in our more mature markets, it's a little bit higher than 10% and I don't know where that can eventually grow. I want to make sure we're capturing that market share. So how we do that, whether it be continuing to add brick-and-mortar stores or leveraging digital, that's what will continue to evolve over the next few years. We're opening up 15 this year, we've already committed to 13 and 16, I feel very comfortable that with the pace but as far as an ending store number, I am not really comfortable putting that out there at this point because the business is changing, consumer expectations, and behaviors are changing and look to be honest with you, the more we can do and grab market share with our existing infrastructure, I think is a huge win.

Your next question comes from Chris Bottiglieri with Wolfe Research.

It looks like you're able to tactically drive volumes in wholesale. I was wondering when you talk more broadly stepping back about the air pocket and SAAR '09 through '11. As you're cycling through that, like what's your view on that, when do we lap that, what you've been experiencing in this [tilt-ward]bend just this lastly, if you're able to, can you just tell us what the average age of the typical vehicles in wholesale?

Sure. So Chris, the average age of our vehicles on wholesale is still right around 10 years. As far as the impacts of SAAR, kind of, that bubble working through, really it's still in that 7- to-9-year-old vehicles. When you think about the SAAR being reduced 7- to-9-years ago, those cars are still funneling through or lack of those cars are still having an impact and I think we are probably at least another 1.5 years or 2 years out before I think that really returns to normal.

(Operator Instructions) Your next question comes from Brian Nagel with Oppenheimer.

This is a follow-up question. On finance, as we look at the quarter, one of the clear positives here was the better trend at finance so the question I have is stepping back is maybe what -- how do you think what's happening in your finance businesses, the better trends we're seeing now a function of true better performance or is it more function of sort of say, a change in expectations from what we saw last year. And I guess, as a follow-up, the question on that too is if we look elsewhere, there's been more signs of I guess some stress in the finance markets, but CarMax is performing well here so to a certain extent you guys -- you're bucking the trend.

Yes, I'll speak to that, Brian. If you look at the CAF income picture from a big picture perspective, receivables are up 10.4% of the portfolio, that's a combination of what we are originating and what's rolling off. Our interest margin contributions are only up 8.8%. So we're still seeing a bit of compression in that but as we are growing the portfolio. The loss provision is lower by $4.4 million this year and that's really a reflection of last year, we were in an environment of escalating losses so not only where we are missing our book expectations, but we are building the provision for expectation of higher losses. And this year, in all 3 quarters, we've been generally in line with our expectations. So I think it's pretty straightforward how the environment has evolved. Where it goes from there, I'm not sure. With regard to us versus others, I can only speak to what we are seeing in our system and the performance of our partner lenders, and as I mentioned in the Tier 3 space, we have seen some improvement in conversion of the applications that they see. I could also remind you that back when we saw the subprime part of our business start to decline, we were -- other people were not seeing the same thing at that time either. But I don't know if we're bellwether or we just run a little bit differently than what you hear elsewhere.

Your next question comes from Matt Fassler with Goldman Sachs.

Also a quick follow-up. A question about the relationship between the cadence of the wholesale market and your used car GPU. One of the questions we've gotten is as we approach the quarter is whether the fact that you're able to sell through vehicles, particularly early to mid-way through the quarter that you had purchased in a more benign wholesale and depreciation environment would've helped GPU. So I'm curious if whether that did play out for a part of the quarter or whether the market adjusted such that the arbitrage that we might have expected wasn't there?

And Matt are you talking about wholesale GPU?

I'm talking about retail to the extent that the market moved higher and the cost of goods moved higher through the quarter if you turn your inventory every 50 or 60 days, whether the cars you are selling through early would have come in a more advantageous price or whether frankly, you just -- you manage through GPUs so that you would rein in the potential profit to move the units.

I mean Matt, you've been following us long enough to know, and I think -- Katharine, is this the 27th quarter we've pretty much been consistent on our GPUs and so as far as having a benefit in early part or the latter part I think we've been able to prove that during different depreciation times, whether it's rising, whether it is declining, we've been able to manage our inventory. I think it's one of the strengths that we have as an organization and I would say this quarter really didn't present any other abnormal challenge. I will tell you the only thing that the little bit abnormal this time around was from a GPU standpoint was the decision to help the customers in Houston with free transfers in. So that was probably the only kind of abnormal thing that we saw this quarter.

Was there any -- and just following up on that, it's my last one, any measurable cost impacts from that or the aggregate of the hurricanes that weighed on your EPS. I don't think you've given us a number that might have held you back a bit this quarter.

I would tell you, I would probably -- it's pretty much non-material.

There are no further questions queued up at this time. I'll turn the call back over to Bill Nash.

Great, thank you, Denise. I want to thank all of you for joining the call today. I want to thank you for your continued support. Providing exceptional customer service and continuing to improve our business is part of our DNA and I'm really grateful to more than 24,000 associates that we have and for everything that they do each day to make this possible. I want to wish all of them and all of you all happy holiday and we will talk again next quarter. Thank you.

This concludes today's conference call. You may now disconnect.