車美仕 (KMX) 2018 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the CarMax Fiscal 2018 Q4 KMX Earnings Release Conference Call.

(Operator Instructions) Thank you.

I would now like to turn the call over to Katharine Kenny, Vice President, Investor Relations.

Please go ahead.

Thanks, Kim, and good morning, everyone.

Thank you for joining our Fiscal 2018 Fourth Quarter Earnings Conference Call.

On the call with me today are Bill Nash, our President and Chief Executive Officer; and Tom Reedy, our Executive Vice President and CFO.

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

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

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

For additional information on important factors that could affect these expectations, please see the company's annual report on Form 10-K for the fiscal year ended February 28, 2017, filed with the SEC.

(Operator Instructions)

Now I'll turn it over to Bill.

Thank you, Katharine, and good morning, everyone.

I'll begin today's call with our quarterly results, then I'll turn it over to Tom, who will review financing.

And later, I will update you on our initiatives.

Our used unit comps for the fourth quarter declined by 8%, and total used units fell by 3.1%.

This was driven by lower traffic and relatively flat conversion.

Remember that in the fourth quarter, we were facing our toughest year-over-year comparison.

We are disappointed with the decrease in our quarterly comps, which we believe was partly due to macro pricing factors that resulted in a softer sales environment.

Although used vehicle pricing has fallen since October of '17, valuations were still significantly higher than in last year's fourth quarter.

The increase in CarMax's average selling price in the fourth quarter was due to growth in our average acquisition cost and would have been higher absent the changes in our sales mix.

At the same time, new vehicle pricing appears to have fallen further, with incentives still higher than last year.

These dynamics, which vary over time, lead us to believe that during our fourth quarter, the pricing spread between new and late-model used vehicles was pressured, which we think adversely affected our sales.

Despite the softness in our fourth quarter, we are encouraged by the fact that the used market has historically been self-correcting, and we believe the off-fleet supply that continues to enter the market should drive used prices lower.

For the calendar year, our data shows that we were able to grow our comp market share by almost 7%, the largest increase in 4 years.

Our website traffic grew in the fourth quarter by 16% as we continue to enhance our website and SEO capabilities.

Gross profit for used unit once again remained consistent at $2,147 compared to $2,134 in the fourth quarter of last year.

Our wholesale units grew by 9% year-over-year in the fourth quarter, due primarily to the growth in our store base and the continuation of a higher buy rate.

The buy rate was supported by the higher used vehicle valuations.

Gross profit for wholesale unit of $946 was similar to the $938 we reported in last year's fourth quarter.

The decrease in other gross profit was primarily driven by lower unit sales, which impacted EPP and service.

In regard to service, we also saw some compensation-related pressure due to the fact that approximately 1/2 of our discretionary bonus was allocated to service.

Before I turn the call over to Tom, let me cover our sales mix and SG&A expense.

As a percentage of our sales, 0 to 4-year-old vehicles decreased to about 76% versus 77% in the fourth quarter last year.

Large and medium SUV and truck -- large and medium SUVs and truck sales were slightly above 27%, down about 0.5% from last year's fourth quarter and up from 26% in the third quarter.

On SG&A, expenses for the quarter increased approximately 6% to $409 million or a year-over-year increase of $207 per unit.

Several factors impacted SG&A expense, including the opening of 19 stores since the beginning of the fourth quarter of last year, which represents an 11% growth in our base and a decrease of $9 million or $47 per unit related to share-based compensation expense.

In addition, as we've discussed in the past, our SG&A expense growth continues to be affected by our investment in technology platforms and digital experience.

However, this quarter's deleverage was largely due to our comp sales decline.

Lastly, while Tom will review how tax reform impacted our quarterly results, let me briefly address our strategy on the use of cash flows created by the reduction in our effective tax rate.

Our goal is to continue to invest in our associates and in our company and drive higher shareholder returns.

As we mentioned in our press release, we paid a onetime discretionary bonus to eligible associates, which was about 80% of our population.

For FY '19, we implemented additional associate benefit options, and we'll be evaluating more enhancements in the future.

We also plan to invest incrementally in our business, including our digital and technology capabilities.

While this spend will put pressure on pretax income growth in FY '19, we would still expect 70% to 85% of the tax benefit to impact our bottom line.

These investments don't change our current outlook on SG&A leverage.

We continue to estimate that we would begin to reduce our SG&A expense per unit at the higher end of our long-term guidance of mid-single-digit comps.

Now I'll turn the call over to Tom.

Thanks, Bill, and good morning, everyone.

In the fourth quarter, we saw some of the same year-over-year trends in sales mix by finance channel that we've seen in recent quarters, specifically some decline in Tier 2 originations, growth in Tier 3 and modest expansion in the percent of sales where customers paid cash or brought their own financing.

The allocation of sales across our lending channels was largely driven by the mix of credit applications.

Tier 2 accounted for 15.4% of sales compared with 18.2% last year.

Third-party Tier 3 grew to 11.7% of sales -- used unit sales compared to 9.4% last year.

And CAF penetration, net of 3-day payoffs, remained flat at 42.8% versus 42.9% in last year's fourth quarter.

CAF net loans originated in the quarter were flat at $1.4 billion.

While unit sales were lower, we saw an increase in the average amount financed commensurate with the growth in CarMax's average selling price.

CAF income increased 22% to $101 million.

This was the result of a lower loss provision and the 9.4% growth in average managed receivables, partially offset by a slight compression in the portfolio interest margin.

Total portfolio interest margin was 5.6% of average managed receivables compared to 5.7% in both the fourth quarter of last year and the third quarter of this year.

For loans originated during the quarter, the weighted average contract rate charged to customers increased to 7.9% compared to 7.4% a year ago and 7.7% in the third quarter.

Our ending allowance for loan losses was $129 million or 1.11% of ending managed receivables.

That's flat sequentially from Q3 and down 1 point -- down from 1.16% in the fourth quarter of last year.

Before I turn the call back over to Bill, let me make a few points about tax and about capital structure.

As you saw in the release, the revaluation of our deferred tax asset was $32.7 million, which is significantly lower than our early forecast.

This was largely the result of deliberate tax planning actions.

Between December when tax reform was enacted and the end of our fiscal year, we identified and executed on a number of opportunities to optimize tax savings related to the change in tax law.

For future quarters, we expect our effective tax rate to be around 25%.

Remember, as we've seen in the past, there's been variability around net estimate due to state taxes and other items, such as the adaptation in fiscal 2018 of the FASB guidance regarding share-based compensation.

We would expect this potential variability to continue in the future.

Regarding capital structure.

During the fourth quarter, we repurchased 1.9 million shares for $128 million.

For the full year, we repurchased 8.9 million shares at a cost of $574 million.

As of the end of the year, we had approximately $1 billion remaining in our authorization.

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

Thanks, Tom.

During the quarter, we opened 4 stores: 2 in new markets for CarMax, Myrtle Beach, South Carolina and Portland, Maine; and 2 in existing markets, Boston and Denver.

During fiscal 2018, we opened 15 stores and had 188 stores open at the end of the year.

In the first quarter of fiscal 2019, we plan to open 3 stores.

Our store in the Greenville, North Carolina market opened last week and is a new market for CarMax.

The other 2 will open in Dallas and Miami, both of which are existing markets for us.

During fiscal 2019, we once again plan to open 15 stores, 10 of which will be in what we define as small markets, that is MSAs with population of 600,000 or less.

We also plan to open between 13 and 16 stores in fiscal 2020.

Now I want to update you on some of our strategic initiatives.

During the fourth quarter, we completed the full rollout of our new enterprise-wide customer relationship management, or CRM, platform to all stores.

The new CRM platform enables a more seamless and personalized car buying experience by delivering a unified view of our customers' shopping and selling history across all locations.

We are also testing an expedited pickup feature in our Charlotte, North Carolina and Lynchburg, Virginia stores.

This option allows a customer to do virtually everything from home and complete the purchase at the store.

The expedited pickup can take as little as 15 minutes, but is all driven by the customer's interest in reviewing information about the vehicle or completing a test drive.

In addition, we completed the rollout of our new 360-degree interior photo feature to all stores.

As part of the rollout, we also updated our photo software in all stores, which will dramatically improve our ability to quickly innovate our photo capabilities in the future.

And finally, we rolled out our new mobile appraisal platform for buyers to nearly all stores this quarter.

The platform enables our buyers to be more efficient, which has reduced appraisal time.

We are very pleased with the progress that we've made on both advancing our technology capabilities for our associates and our digital experience for our customer, not only for the quarter but for the year.

This coming year, we will continue to focus on meeting the customer on their terms, whether it's in the store, online or a combination of the 2. Customers want flexibility and control in their shopping and buying experience.

Our associates, our national footprint, brand strength, infrastructure, inventory scale and our continued investments in technology and digital capabilities position us to continue to lead the used car industry.

At this time, we'll be happy to take questions.

So, Kim?

(Operator Instructions) Your first question comes from Matt Fassler from Goldman Sachs.

My question relates to the dynamic you spoke to in the macro environment.

And it's really, have you ever seen the reaction to pricing dynamics as extreme as you're seeing right now?

And what do you think it will take for the environment to normalize as you think about the current backdrop?

Matt, your question broke up a little bit, but I think you were asking about the macro pricing environment and kind of what do we think about it.

As I said, obviously, first of all, we're confident over a tough year-over-year, but a big factor of that is the pricing environment.

I think it really hits on 2 sides.

It's not only that our acquisition price went up on all inventory, but I also think that there was pressure on the spread, as I mentioned in my opening remarks.

I think there was pressure on the spread between a late-model used car and a new car, both because of our acquisition price going up and new car prices coming down in relative terms year-over-year.

If I look back over the last 2 years, we've been seeing prices -- all last year, we saw our acquisition prices going down.

The first 2 quarters of this year, we saw our acquisition prices going down.

Third quarter, we saw a little bit of an uptick, and then we saw a significant uptick in the fourth quarter.

I think this is one of those things that you -- we've seen in the past that we'll just work through.

Like I said in my opening remarks, the wholesale market is pretty much self-correcting.

It takes a little bit of time, but it will end up correcting itself.

The other thing I would just say is from a comparison stand year-over-year, we lapped some big technology improvements, the biggest one being online finance.

Last year, we saw a larger supply of affordable large, medium and -- large and medium SUVs, which we hadn't seen the year before.

So I think there's a lot of noise that's basically going on there.

If you can hear me a bit better now, as we look for clues to improvement, should we be more focused on used car pricing as best we could follow it or more focused on what we see in the new car incentive environment?

I think, really, what we should be focused on is just the overall wholesale environment and what it's doing to prices across the board.

Are the acquisition prices going down?

Are they going up?

New cars certainly placed in is part of that when you talk about the spread, so it'll be interesting to see as we go forward.

Although it seems like the incentives have started to come down a little bit, they are still higher than they were a year ago.

Your next question comes from Scot Ciccarelli from RBC Capital Markets.

Can you help us better understand some of the various pressures on gross profit in the other category for the quarter, specifically on the service revenues, et cetera?

Sure, Scot.

Like I said, on the service side, we had a little bit of a headwind.

I mentioned one, the thank you bonus.

A big chunk of that thank you bonus went right to the service line.

So it was overcoming that.

We also saw an increase in some health and welfare fringe benefits that went into that line item as well.

And then, of course, just the impact of lower used sales and the deleveraging by not selling as many cars also was an impact.

Yes, Scot, let me – I can give you a little additional color, too.

I mean, the way that we're accounting for the service business is that we apply kind of a standard cost and fees to each car.

And we have to cover our overhead, which is pretty much fixed and based on the staffing that we have.

If we have a reduction in the cars versus our expectations, it doesn't -- that line item is not going to cover all of the overhead that we've got buried in there.

Also, with regard to kind of compensation and health and welfare, it's a very big piece of the overall P&L for service.

And so changes -- and it's a relatively small profit line from a P&L perspective.

So swings in that part of the service line will have a more dramatic impact on overall profitability there than they do for the company overall where you've got all of the SG&A taken in.

And then, I guess, the mix on the lending Tier 2 to Tier 3, that's pretty much a direct flow-through from revenue down to the profitability, right?

That's 100% flow-through, that $5 million?

Yes.

I mean, as we've talked about before, every Tier 2 that swaps to a Tier 3, you lose $300 in commission that we get from Tier 2. And it turns into paying out $1,000.

So there's roughly a $1,300 swing in everything that you see move out of Tier 2 and into Tier 3. We've also seen growth in other, which represents 0 versus getting paid in Tier 2.

Your next question comes from Sharon Zackfia from William Blair.

I appreciate the color on the full year market share, and I know that shorter periods are kind of harder to discern.

But I'm just wondering if you believe you're seeing any signs of competitive infringement over the past few quarters or anything that would kind of impede the longer-term unit growth runway or market share runway?

No.

From a competition standpoint, we believe our prices are absolutely competitive.

And part of that is just by the continued large volume of vehicles that we sell in any given location.

I mean, we're still averaging for the year over 330 vehicles per location.

And that being said, we also monitor our competitive pricing, both regionally and locally.

And Sharon, as you know, we're constantly testing every quarter, raising prices -- I'm sorry, taking our margin and maybe lowering it, raising it.

We're doing pricing tests all the time to see elasticity on the impact that it has on sales.

And what I would tell you is that we're obviously trying to sell as many cars as we can, but to also optimize total gross profit dollars.

So we feel very comfortable on the competitive landscape at this point.

Can you also give us an update on where your aggregate market share is at this point?

And is -- where is your top market share now?

Is that Richmond or Charlotte?

And where does that stand?

Yes.

So our top markets are going to be our oldest markets because they've obviously been through the most buying cycles.

So it'll be your older markets, the Richmond market, the Charlotte market, some of these older markets.

Our -- you're asking -- I think you were asking about the national market share, how do we stand there?

Right, relative to kind of where you are in those oldest markets.

Okay.

Nationwide, we obviously gained market share.

Market share on the national level actually was a little bit higher gain.

I think 7% was the comp.

National was a little bit higher than that.

National was still about -- when you look at 0 to 10%, we're still around 3.3% in the comp markets.

We're more like 4.5%, 4.6%.

And then in our most mature markets, we talked about before being at above 10%.

Your next question comes from Brian Nagel from Oppenheimer.

The question I have, Bill, I just want to dive a little bit deeper.

This goes down to the first question that was asked just with regard to the pricing dynamic.

You're calling out that being sales headwinds during the fourth quarter.

But so I just want to look at, how do we -- how should we make sense of the various cost grids out there ? Because clearly, a larger supply of off-lease vehicles now hitting the market, which should be -- it should weigh upon pricing.

If we go back to the -- your third quarter conference call, I think we talked about post-hurricane, this dynamic being an issue.

But it sounded like it had started to normalize or abate somewhat early in the fourth quarter.

So I guess, what I'm -- the question I'm asking is, how should we make -- what's behind all these factors?

What's actually happening out here?

And then is it still a hurricane issue?

And give us more specifics on how we should think about when this should -- this dynamic should abate.

Sure, Brian.

So as I think about the supply, like I said earlier, if you go back all through last year and through the first 2 quarters of this year, the added supply of, let's say, off-lease cars coming into the marketplace absolutely benefited us from an acquisition costs.

Our acquisition costs all of last year and for the first 2 quarters of this year were down, which you would expect to see when you have a higher supply of vehicles.

There was the third quarter dynamic, where you had this big push on inventory demand because of the hurricane replacement.

So in the third quarter, we saw our acquisition prices started to -- start to tick up in the third quarter.

That continued into the fourth quarter.

And remember, we're buying inventory during that period, and we're buying inventory that will get us through for a couple months ahead of time.

So do I think that the -- we're kind of through the inventory anomaly that was post-hurricane?

I do think we're through that, but prices still have to recover.

While they're depreciating, they still haven't gotten back to where they were a year ago.

Okay.

And then as far as my follow-up, and I understand it's difficult, but is there a way to isolate what specific impact this had on your comps?

And I guess, another way to think about that is, is it -- is there a group of -- given the vast array of cars you sell, is there a group of cars that are just proportionally skewed to this?

No.

This was -- I mean, when we look at it, it's basically broad-based.

The acquisition cost is up for pretty much everything.

So I wouldn't say it skews to one group or another.

And I think that's also just reflected in our wholesale performance and having a higher buy rate, more units in wholesale because it's reflective of a trickling down, the expenses up on everything.

And then any quantification of the impact on Q4 used car unit comps?

Yes.

It's -- I mean, it's hard to say.

Of the 8% -- negative 8% X amount, it's hard to say because it really trickles down into so many different things because, for example, not only is everything more expensive.

But last year, we saw a little bit of a tailwind because there was more affordable large/medium SUVs.

Well, now everything's up, so there's an impact on that.

So it's hard to actually quantify certain specific percent, but I personally believe it was a -- it's been a large headwind.

Your next question comes from Seth Basham from Wedbush.

When you look at this quarter's comp, was there a bigger deterioration in comp traffic or conversion relative to the last fiscal quarter?

Yes.

So our conversion was basically flat.

We had a larger decline in traffic when you think about it from quarter-to-quarter.

So I'd say more of it was on the traffic than the conversion.

Got it.

And when you think about conversion, it did slow somewhat.

What do you think the drivers are of the slower conversion this quarter?

Is it simply lapping the rollout of things like preapproval of financing online?

Or are there other things that you can point to from a conversion standpoint?

Yes, no, it's interesting because we've been having some incremental conversion each quarter here recently, and this one was a little softer.

If you look at website traffic for us, it's up again double digits.

And a lot of that growth is being driven by SEO, which generates leads just like paid advertising.

I think when you look at the leads, any specific read type converts the same, whether it's SEO or SEM.

But what you have to look at on a quarterly basis is the quality of those leads.

Some leads convert a little bit better than other leads.

And I think during the fourth quarter, we saw an increase in leads that don't necessarily correlate as high as some other more aged vehicle specifically.

So what do I mean by that?

In the fourth quarter, we saw more appraisal leads.

Well, appraisal leads don't necessarily convert as high to sales as, say, a vehicle appointment lead.

So in any given quarter, you can have a mix in the lead types, and I think that probably plays into a little bit of the -- of where we landed in conversion this time, which I also think is highly impacted by some of these more macro pricing environments.

Got it, okay.

So a continuation from last quarter in terms of the quality of the leads deteriorating a little bit.

In terms of the absolute growth in digital online leads, were you still doing double-digit?

Yes.

We still are doing double-digit, but it's not as big double digits as what we've seen in the past.

And I think that's partly because we're lapping over some investments and some rollouts of some things.

And I also think it's partly because of what we're seeing from a pricing standpoint.

Your next question comes from Michael Montani from MoffettNathanson.

Just wanted to ask, first off, if I could, can you just discuss a little bit the credit and lending environment, in particular if there's any incremental tightening either from CAF or Tier 2 partners or if you're more still in a mode of cycling tightening that I think began around 3 quarters ago?

Yes.

I can kind of -- this is Tom.

I can kind of walk through it.

With regard to CAF, we talked about some tightening last year and early this year.

But that's -- we've been pretty much consistent in our lending behavior since then.

Obviously, we're looking at rates real hard now with the increase in the benchmarks, but that's something we're doing on an ongoing basis.

As I mentioned generally, the shift in mix and the lending environment has been a result of the -- kind of the nature of the volume of applications coming through the door.

I can comment a little bit on Tier 2 and 3. Tier 2 is down year-over-year about 2.8 points.

One is we've seen application volume is down across the board, but most heavily in that kind of middle range.

And we've also seen some deterioration in conversion, which we measure by its kind of sales to applications that we look at in that Tier 2 space.

I think some of that's the nature of the applications they've been seeing, and some of it is lender performance in that space.

We've been talking about weakness over the last several quarters with at least one of our Tier 2 lenders.

I also think that in Q4 of last year, we may have had been buoyed a little bit by some lender testing by other Tier 3 guys -- I mean Tier 2 folks.

So year-over-year, in the fourth quarter, I think Tier 2 was probably a bit of a headwind from us based on those factors.

Tier 3 continues to perform well.

We've seen consistent, over the course of this year, at least since early, call it April, year-over-year improvement in their sales applications, so in the quality of their activity for us.

And I think they've also benefited from some trickle-down from Tier 2 not proving as strong.

But overall, I would describe the environment in our stores as robust as ever.

More than -- significantly more than 90% of customers are getting approvals that come in the door.

And I -- in the Tier 2 space, I'd also mentioned that we've introduced another lender over the course of the year, and that is Chase Auto.

Okay, great.

That's helpful color.

And if I could just follow up on 2 fronts.

One is if you can provide an update on the home appraisal initiative that you all have been doing as well as home delivery.

And then the other question was just around finding that right balance between GPU and share because some of the data we had seen, it looked like there was modest growth in the market for used car units, but it came at a really heavy cost in terms of GPU when we think about some of the franchise dealer peers.

And you all have always been, I think, a little bit more disciplined in terms of balancing that.

So I guess the question was, are you comfortable kind of continuing to sacrifice some share, if need be, in order to maintain or hold the GPU?

Okay.

So on the first couple points, online appraisal and home delivery.

So online appraisals, we continue in 10 stores.

We're actively working on different presentations to the customer, and we're continuing to learn some different things.

So I don't really have an update for you on that at this point.

Home delivery, I tend to think about home delivery on a more broader view, which is alternative delivery, home delivery being one of them.

We've been focused on building out the capabilities to enable not only home delivery, but things like expedited delivery.

And as you heard, we've started to test expedited delivery in some stores.

So I'm pleased with the progress that we're making on both of those fronts.

As far as the GPU and share, look, I talked a little bit about it on the earlier question.

We want to maximize the sales and maximize -- we want to maximize sales, but we also want to maximize total gross profit dollars.

And could we have sold some additional cars if we lowered our margin and lowered our prices?

The answer is yes.

Do we feel like, net-net, it would have netted out more total gross profit dollars?

No.

So but that being said, we're continuing.

Every quarter, we test that elasticity, and we're doing tests.

So it's not that we're opposed to changing up the GPU as long as it produces more -- as long as it produces better financial results and total gross profit dollars.

Your next question comes from Matthew Ziehl from OppenheimerFunds.

Just wanted to ask if there was any weather-related that, I guess, would show up in geographic in the fourth fiscal quarter related to winter weather.

We got back to normal to and at times, nasty winter.

Did you notice any meaningful difference in comps between Sun Belt and more Northern markets that weather could have had some impact and maybe had an aggregate impact?

Sure, Matthew.

Yes, we obviously had lots of weather during the quarter.

But like we said in the past, weather, generally, once you get through the weather, you eventually get back those sales.

We don't think that it was any type of driver on where we ended up on comps.

Because, generally, the only time that would impact you is if you had a big weather event in a lot of stores at the very end of a quarter, and we did not see that.

So while there was impact on weather, we felt like, like we always do, that you generally get those sales back once the weather's passed.

Okay.

And just following up just to -- not to beat the horse too much on the gross profit question.

You actually have your GPU tick up this quarter, and it was a bit surprising that you're willing to forgo so much sales without even giving up any gross profit.

It's not saying all or nothing, $200 or $300 like some of your public competitors have, but it does seem a little surprising that you were willing to hold the line so hard on gross profit that it actually ticked up this quarter.

Is that -- how -- maybe I don't understand how you do your testing and how real-time it is, but is it possible that you were actually surprised at the end of the day by how much the sales were down and maybe your testing methodology of testing elasticity isn't quite as real-time or rapid feedback as you need it to be?

No.

Well, first of all, on the slight tick-up, that's just -- that's within the noise range for us.

That's not us – because everybody was saying, oh, we're going to make even more.

That's just within the noise range.

And again, I go back to I feel very comfortable with our testing methodology and -- because we do it every quarter and we can see the results real time.

So again, if you ask me if it was a surprise that we gave up so much sales, I just don't think that's -- I don't see that.

Your next question comes from (inaudible).

I guess what surprised me this quarter was looking at the used car sales data from Edmunds for the industry, it looked like the number was up 3% year-over-year for December, January and February.

So given the lift there and then companies paying out employee bonuses, including yourselves, means people have more money in their pockets for purchases, including cars.

So in light of those tailwinds, I was surprised to see the same-store sales come in where they were.

Can you sort of walk me through what I might be missing there?

Yes.

So I can't speak to the Edmunds data.

What I can speak to is we look at market share on a 12-month period because what we have found is that the market information is lagging.

And it takes a couple of 3 months to -- for it to catch up.

That's why we reported on a 12-month calendar year basis so we have a better understanding of it.

And we use poked data, which is DMV data.

So what I would say is what we've seen is for the calendar year, at least, that the overall used car market was fairly flat.

So I can't speak to the Edmunds for the last couple months.

No, I'm not sure how accurate it is on such -- looking at it on such a short basis.

Okay.

And I'm sure it's hard to extrapolate, but have you seen anything as far as employees with the bonuses and coming back to your stores or just given the commentary you've had on traffic that it's maybe not so much?

Yes, I wouldn't have anything that would call it out.

Okay.

And just one more.

The -- you're opening up 16 new stores, 10 in small markets.

Maybe you could talk a little bit about plans to drive same-store profitability, given sort of the emphasis on driving profitability in stores versus the actual store count.

Yes.

So we are opening up 15 stores this year, and I've talked about this before.

While we still have plenty of runway to continue to open up stores, we want to continue to try to push comp growth in our existing stores.

We want to try to get more out of the existing boxes that we have, and we feel like a lot of these strategic initiatives that we're working on will help to enable that.

So when we think about growth, we think about market share and how do we continue to gain market share.

And while adding stores is one component of that, equally important is continuing to make sure that we leverage the existing footprint that we have.

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

Just a first question.

I mean, given all the volatility or sort of a spike up in used vehicle pricing, I mean, Bill, do you ever consider maybe going a little bit slightly older in the age spectrum in these periods of time to get a little bit further away from sort of this competition with new vehicles to try to help same-store sales?

I mean, I understand you're very focused on GPUs and managing those, but I mean, is there an opportunity to maybe just drop down 6 months or a year in the age spectrum?

Well, John, we'll put out there on the front lot whatever the customers are looking for, and we sell up to 10-year-old cars in retail.

We also have a huge wholesale business.

So we want to make sure that the cars we put out there obviously meet our quality standards.

If they don't, we put them in wholesale.

So when I think about older vehicles, I kind of have to think about it and the aggregate of both retail and wholesale because I think as we look at some of the competitors that are out there, as they add later-model used cars, that's really kind of something that we've been doing, but we do it through the wholesale channel.

So as customers want that 8-, 9-year-old car, then we'll absolutely go out and source it.

But the pricing dynamic that you saw, whether it's a late-model used car or if it's an 8- or 9-year-old car, it still exists and the price is still up.

So that's a headwind no matter which piece of the inventory you're looking at.

Okay.

And then just a quick second question or follow-up.

I mean, our understanding was there was a huge sucking of inventory out of the rest of the country into Texas and Florida post the storms, and that really created this weird dynamic, where there was excess inventory in those markets and not enough in other markets.

So for this to -- for the supply and used vehicle pricing to really adjust, you kind of need those vehicles to flow back out of those markets.

It doesn't seem like that's happening that quickly, and pricing is remaining fairly high.

So I know you kind of answered this question before.

But I mean, do you see that kind of dynamic in your stores, in the auctions your buyers are going to, where those vehicles are flowing out and we're getting this adjustment that was kind of wacko towards the end of last year?

And just trying to really gauge when this normalizes because it doesn't seem like it's normalized quite yet.

Yes.

What I'd say, John, I don't think inventory availability in our stores was cause for concern for us.

I agree, I think there was a big influx of vehicles that went down there.

We certainly supported our stores by moving inventory down there.

But inventory's still been available around the country, so I don't think that, that is a big factor.

I do feel like we managed inventory very well this quarter given the softness in sales that we saw.

Our inventory only grew slightly, and that was really just to support the growth of the new stores.

Your next question comes from James Albertine from Consumer Edge Research.

This is Derek Glynn on for Jamie.

I just had a follow-up on some of your initiatives.

So you have the logistics in place and the technology backbone to enable home delivery or expedited pickup.

If you decide to roll this out across your store base, how quickly could you scale this?

What would that rollout pace look like?

Not really prepared at this point to talk about timing on that.

I agree with you.

I think we have an unbelievable logistics network that we continue to improve.

We're continuing -- as I think about the investments we're making in the business, I think that's another area that we continue to invest in, in our transportation, in our systems.

What I would tell you is we move a lot of cars.

We're moving close to 2 million cars a year.

Moving cars is not an issue for us.

And moving cars and getting them to individual homes, that is not an issue for us.

We want to make sure that when we roll this, it's the product that we want out there representing CarMax, which is why we've been so focused on building out the capability.

So I'm not ready to talk about a full rollout on this, but we'll talk more about that in future quarters this year.

Your next question comes from David Whiston from MorningStar.

A question on the small market expansion.

Are you noticing any real difference in the customer demographics there versus your legacy markets in terms of the credit income and the expectation either on service or also on, back to John's question, on the age of the vehicle they're looking for?

No, we haven't noticed anything that would be worth calling out.

And the main reason that we talk about the small market is just to give you an idea of the size of store and therefore, the volume.

But we have not noticed any noticeable difference on customer demographics.

I'd add a little color there.

I mean, we see differences in every market that we go to.

Boston is different than Atlanta, is different than Houston, et cetera.

And we contemplate those differences in demographics in our estimates of how we can sell cars there, and the small markets are no different.

They're going to vary little bit between themselves.

But in our models, we will contemplate those factors and make sure that we're investing the right amount of money to get the returns we need.

Okay.

And one -- just one more question on buybacks.

Obviously, you had a soft quarter now, and there's a lot of uncertainty in the macro environment.

If -- my question is, if you get a rather noticeable selloff in the stock in fiscal '19, are you willing to accelerate your buybacks to be more aggressive?

So the answer is yes, but we're not going to share -- we don't have any view at this point on what we would do and when.

We're continuously looking at that.

And as you know, we've talked about it in the past, we take a programmatic approach to the buyback program, targeting a certain target range for leverage.

To the extent we have more cash flow and need to manage to that level, you'd see a tick-up.

We put guardrails in place so that our program automatically buys more when the stock is at a lower value and buys less when it's a bit rich.

But we have the opportunity to do additional volume if we see fit.

And if that ever comes to fruition, we'll obviously tell you about it.

Your next question comes from Chris Bottiglieri from Wolfe Research.

Want to focus on expensing a little bit.

So you maintained your mid-single-digit algorithm despite the announced reinvestment simplification as you pull back on the core algorithm.

Want to get a sense, is that just due to lapping investments like smaller store growth on -- versus leads or something else?

Then I have a follow-up.

Chris, that's really a function -- while we are continuing to invest, that's really a function of being very disciplined and making sure that we're taking waste out of both our SG&A and our cost of goods sold.

We've been focused on -- talked about the focus on that really for the last 1.5, 2 years.

On the SG&A side, we've really been focused on strategic sourcing and procurement, staff utilization.

On the cost of goods sold side, we've been focused really on parts and labor efficiencies.

And as I look at those 2 buckets over the last couple of years, we've taken tens of millions of dollars out of there.

And then I think in addition to that, knowing that we're doing some incremental investments, I've talked about it in the past, not allowing it all to be incremental and being disciplined on what we're spending our discretionary money on as we continue to advance the organization forward.

So I think it's a combination of things.

That's helpful.

And then I just want to step back on the mid-single-digit algorithm.

Can you give us a sense of how much flexibility you have there?

Obviously, you're taking some cost out, but want to get a sense how much of that's tied to like store growth and how much of that's tied to like growth initiatives that you have.

Just like why does it have to be mid-single-digits and how you think about that long term?

And that's just the guidance that we basically have given.

As we continue to grow, we've always said it's going to take that mid-single-digit range, although it's a little bit higher right now, given the strategic investments.

I would expect that over time, as we have more stores and our new growth -- store growth becomes less of the percent of the store base, we should be able to leverage less than that.

What I would tell you is that time is not right now because we're investing back into the organization and to the future of the company.

Your next question comes from Brian Nagel from Oppenheimer.

So I wanted to -- with my -- for this follow-up, I want to just go back to just the pricing dynamic in the environment.

What we're seeing in our channel checks is there's maybe a dislocation with regard to residual values in the off-lease vehicles going back to market.

So the question I have is, are you seeing that, too?

Is that contributing to this pricing environment that you're highlighting?

And if so, how does that change the pace at which it'd abate?

Yes.

And I assume when you're talking about the dislocation of residual value, you're talking about the cars that are coming back and surprisingly, they're not worth what they originally thought there were going to be worth.

Is that what you're talking about?

Yes, that's exactly what I'm talking about.

Yes.

I don't want to say I told you so.

Back when we saw these lease -- a high lease -- the high lease penetration that was getting to leasing, putting a residual value on a vehicle is a tough thing to do.

And as history repeats itself, these cars come back.

They're not worth what people thought they were worth.

For us, because we're not taking those cars in right from -- direct from the dealer manufacturer, buying those from the auction, they're going to go for what they're worth.

They may hold onto them hoping that they'll bring more.

But ultimately, they're going to end up selling them.

And so we're buying them.

We don't necessarily have to worry about what they have in them or what they have to get out of them.

We're going to pay what we're willing to pay.

So I think while it maybe impacts some of the publicly traded retailers, that dynamic does not necessarily impact us.

Yes, but, Bill, from a bigger perspective, you step back, I know I just (inaudible) you guys are actually well positioned for that.

But could this also -- could the residual issue also be leading to artificially higher prices in the marketplace with which you have to compete against?

And then does it actually slow down the pace of those cars potentially making their way to CarMax?

Yes.

Look, like I said, we've seen increased supply coming in for the prior 6 quarters before the third.

I don't see where folks are having to step up and -- because they're having to pay more on these vehicles to acquire them.

If they do, I actually think that's a good thing for us because their acquisition price is going to be higher than what our acquisition price is through the auction lane.

So I think that's actually a plus for us.

Your next question comes from Jonathan Carmel from Arbiter.

I don't mean to beat the dead horse on GPU, but can you be very specific for a 1% change in comp sales, how many dollars you think that takes at the moment and how that has changed over some period of time?

Yes.

No, I'm not going to be specific and tell you what 1% of sales, what you have to do to -- from a pricing standpoint.

And again, we look at this every quarter.

And surprisingly, it's been fairly consistent.

The ratio has been fairly consistent.

But that's not to say that it doesn't change from time to time, and we continue to evaluate it every quarter.

There are no further questions at this time.

I turn the call back over to Bill Nash.

Thank you.

I want to thank everyone for joining the call today.

I especially want to thank our associates for everything they do.

If you didn't see in February, we were honored again on Fortune Magazine's 100 Best Companies to Work For.

This was our 14th consecutive year on the list, and this is truly a testament to our associates and how they care for each other, how they care for the customers and how they care for their communities.

I want to thank you all for your time and your interest in CarMax, and we will talk again next quarter.

This concludes today's conference call.

You may now disconnect.