Tom Folliard - President, CEO Dandy Barrett - Assistant VP IR Keith Browning - EVP, CFO

Matt Nemer -Thomas Weisel Partners Sharon Zackfia - William Blair Edward Ahruma – JP Morgan Mark Johnson - Principal Global Investors Rod Lache - Deutsche Bank Securities Scott Ciccarelli - RBC Capital Markets Matthew Fassler - Goldman Sachs Michael Novak - Frontier Capital Brad Thomas - Lehman Brothers Bill Armstrong - CL King & Associates Hardy Bowen - Arnold & Bleichroeder

Welcome to the CarMax second quarter earnings release conference call. (Operator Instructions) I would now like to turn the call over to Dandy Barrett, Assistant Vice President of Investor Relations. Ms. Barrett, you may begin.

Thank you, Heather, good morning. Thank you for joining us this morning. On the call today are Tom Folliard, our President and Chief Executive Officer; and Keith Browning, our Executive Vice President and Chief Financial Officer. Before we begin, please let me remind you that our statements today about the Company's future business plans, prospects and financial performance are forward-looking statements that we make relying on 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. They involve risks and uncertainties that could cause actual results to differ materially from our expectations. 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, 2006, and our quarterly and current reports on file with the SEC. Now I'd like to turn the call over to Tom.

Thank you, Dandy. Good morning, everyone. Well, as you've probably seen by now, we had a pretty good second quarter. I'll start with earnings. Our earnings increased 44% to $54.3 million, or $0.50 per share compared with $37.6 million, or $0.35 per share in last year's second quarter. This year's quarter also includes $0.04 per share of CAF favorable items. Total sales increased 18% to $1.93 billion and comp store used units increased 7%. As for sales, we had pretty solid store execution, plus increases, increased traffic in both our stores and on CarMax.com. All of that contributed to a very strong sales and earnings growth in the second quarter. I'm very pleased we were able to accomplish this on top of a tough 10% comp comparison from last year. Total used vehicle sales revenue increased 23%, including a 15% increase in total used units, 8% of that from new stores and 7% from the comp sales increase I mentioned earlier. Our used car average selling price were up 7%. This primarily reflects a higher mix of SUVs compared with last year, which is similar to what we saw in the first quarter. Wholesale sales were up 17% in terms of units, primarily driven by our expanding store base and an increase in appraisal traffic. Our new unit sales declined, which is reflective of the softer new car industry trends and our conscious decision to sacrifice some sales and try to improve our new car margins. In terms of gross profit, compared with last year's second quarter, used vehicle gross profit dollars increased by a little more than $100 a unit to $1,963. Similar to the first quarter, we saw a benefit from a strong steady sales performance across the quarter, which meant that we took fewer markdowns to be able to move our inventory; very similar to what we saw in the first quarter. Our wholesale vehicle gross profit dollars, excuse me, increased by about $120 per unit to $699. I think that's really reflective of the last couple of years for us. We've benefited from continuing refinements in both our car buying process and increased efficiencies in how we run our in-store auctions and we've been talking about that for a while. Our wholesale gross profit per unit was down slightly from the first quarter, reflecting a little bit more of a normal seasonal moderation in wholesale pricing. On to CAF, CarMax Auto Finance income increased 53% and there were several contributing factors to that, including the growth in our total sales and in our managed receivables and an increase in the average amount financed occurring in conjunction with the rise in average retail that we mentioned earlier. Additionally, the recent pause in interest rate increases have also helped us, allowing the gain on loans originated to improve to 3.9% from 3.3% in last year's second quarter. We also recognized a $0.04 per share benefit from lowering our loss rate assumptions. As many of you know, we've lowered our loss rates several times in the last two years. The receivables have continued to outperform even our lowered assumptions, however, requiring us to make this adjustment once again. For SG&A, our SG&A ratio was down slightly this quarter, 10.4% from 10.5% last year and as expected, we absorbed a roughly 30 basis point increase related to higher stock-based compensation costs. The increase largely related to the accelerated vesting of Austin's options upon his retirement. These options accounted for $0.03 of the $0.08 per share of stock-based compensation expense in the quarter. Well, given the strong first half of the year and the fact that's all behind us, we believe it's appropriate to update our full year expectations. We now expect for the full year, comp store used unit growth in the range of 6% to 8%. If you remember, at the beginning of the year, we said 2% to 8%, so we're tightening that up a bit. Earnings per share in the range of $1.55 to $1.65 per share. This represents an increase of 23% to 31% versus last year's restated $1.26 per share. Stock-based compensation expense is expected to be $0.19 or $0.20 per share this year compared with $0.13 per share last year. Please remember our earnings comparisons are much tougher in the second half of the year and we have not assumed that earnings growth continues at the same pace it did in the first half. In particular, we expect wholesale profits will be a little lower in the second half of this year compared with last year. You may recall we benefited from some very unusual conditions in the second half of last year, which at the time we said we didn't expect to repeat. Last year's second half also included $0.06 per share of CAF favorable items, which we also don't anticipate in the second half of this year. Finally, SG&A leverage will be very difficult to achieve in the fourth quarter. We'll be cycling unusually favorable healthcare costs and property taxes from last year's fourth quarter, and we also expect pre-opening costs to be significantly higher, as we are opening five stores in this year's fourth quarter versus no openings in last year's fourth quarter. As is always the case with us, we have assumed that we don't experience any particularly unusual winter weather events in the fourth quarter, which can cause some turbulence, as all of you know. In terms of our growth plan, we remain on track. We now expect to open six stores in the second half of the year, most of which are scheduled to open in the fourth quarter. This will bring our total store openings for the year to ten, representing a 15% increase in our store base for the year. The opening for our third store in the Charlotte market, the Gastonia store, has slipped from Q4 this year into Q1 of next year, due to normal construction delays. Now, before I open it up to questions, I have an announcement I'd like to make. Dandy will be retiring next month, and I would just like to thank Dandy. I know I speak for Keith and everyone else at CarMax when I thank Dandy for her innumerable contributions to CarMax. She has been with CarMax and Circuit City for a combination of eight years, came over to CarMax full-time in March of '01; has been instrumental in the smooth spin-off from Circuit City, which was completed in October of '02 and has just been an incredibly valuable member of the team and a huge piece of CarMax's success. I just wanted to take this time to thank Dandy with all of you on the call, many of you who know her very well.

Tom, thank you very much. I can say only that it's been my privilege after having worked for, during my career, five Fortune 500 companies to have the very best be my last experience. That's due to the team here at CarMax – sorry. As well as having the privilege of working with all of you out there, it's been my pleasure. Thanks.

You're welcome. We had a little bet whether Dandy would make it through that.

I lost.

Okay. We'll open it up for questions. Thank you very much, Dandy.

Your first question comes from Matt Nemer - Thomas Weisel Partners. Matt Nemer - Thomas Weisel Partners: Good morning, everyone. First question is, I'm wondering if you can help explain the disconnect between your comp performance, which has been exceptional and industry data? The CNW, the marketing, the auctions are also suggesting that demand at retail is weak. I think CNW is saying that used vehicle sales are down double-digits. Just wondering if that's share gains or if it's the markets that you're in, or your product mix?

Matt, I think it's probably a combination of many of those items, but the biggest piece that we have focused on is setting up our business to outperform the industry regardless of the macro environment. I've talked about this a little bit. Last year when the manufacturers came out with all their big promotions -- and, obviously, that was a huge impact on just the car business in total -- and we were able to still come out with 10% comps. This year, it wasn't that the manufacturers didn't try to move the needle once again, it's just it didn't flow through to the consumers as it did last year and once again, we were able to outperform. I think it's just a testament to the CarMax consumer offer being superior in the marketplace and I'm very pleased we were able to do that. I think our goal long-term is to continue to set our business up in a way that we can outperform whatever the environment happens to be from a macro level. Matt Nemer - Thomas Weisel Partners: Second question, clearly the wholesale profit move, it seems sustainable. I guess I'm wondering if you could reiterate or take us through again what the major factors are in that business that have changed over the last year or two?

Well, I think one of the things is that it's been more of a smooth and steady increase in wholesale performance, I think, than many people believe. If you look back at our reports over the last three or four years it really shows up in the numbers that this has been a steady improvement, not a step function increase at any one point in time. Excluding the third and fourth quarter of last year, which we said were exceptionally high. I think the biggest reason for our wholesale improvement is we've made continuous improvements in the way we deliver the consumer offer and buy cars on the front end of the process and I think we've gotten more efficient at that. I think we have been able to continue to increase our buy rate over time, but at the same time, really figure out which cars have a little bit more tolerance in terms of the offer. And then more importantly, we do an outstanding job running our auctions. We have the highest attendance ratio of any auction company that you could find out there. Our average attendance is for every two cars, we get one dealer. So if we run a hundred cars at an auction, we get an average of about 50 dealers to show up, which really maximizes the amount of money we can generate for a car, then we're able to manage that back into the offer. Our product is very consistent in the auction. Our average sale price is around $4,000. Our average miles are over 100,000. It's a very consistent delivery of product on a very regular basis. Our customer base of dealers, they're used to coming to our auctions on a regular basis, they know exactly what to expect out of us. Although we run what's called a red light auction or an as-is auction, we make as many announcements as possible about what we know about those vehicles, and I think the customers that come and buy those cars from us are very confident in the product that they buy from us. We have an extremely high sale rate. We sell about 98% of what we run through the auctions so they know if they come and they bid on the cars and they're the top bidder, they're going to buy the car and that just generates a lot of revenue there in the auction. I think what we've gotten continuously better at is the ability to get a better price realization, but at the same time be more efficient in buying those cars up front. So it really isn't any one item. I think it's a combination of all those things and it's the continuous improvement that we've piled on over the last five or six years. Matt Nemer - Thomas Weisel Partners: Last question and then I'll let somebody else hop in. On the expense front, it seems like the leverage was held back by something. Is that the expense items that were shifted from the first quarter into the second, or what's behind that?

No, it's not really, and in comparison to the first quarter, I think we had a 50 basis point improvement. This quarter if you subtract out the 30 basis points I talked about earlier, we have a 40 basis point improvement. So it's similar apples-to-apples to the first quarter in terms of the SG&A leverage. So when you subtract out those 30 bips, it's not really that much different. There isn't really one item in there, and in terms of the timing of the expenses we talked about in the first quarter, that's really more into the second half of the year and not so reflective of the second quarter. Matt Nemer - Thomas Weisel Partners: Great. Congratulations, and Dandy, you'll be missed.

Thank you very much.

Thank you.

Your next question comes from Sharon Zackfia - William Blair. Sharon Zackfia - William Blair: Hi. Good morning. A couple questions. Can you update us on how the new stores are doing as a class in terms of their productivity and how they're hitting your model or where they're falling? And then I think there have now been a couple of stores that have blown into next year, if I'm not mistaken, so are we going to look at new store growth closer to 20% next year than 15%?

We haven't announced that as of yet and I think it's only one store that moved. Is it one or two?

One.

It's really just this one store that's moved, Sharon, so our range holds true, the 15% to 20% store growth. We'll expect to deliver that again next year even though Gastonia slipped, I don't think that will push us over. It may go up from 15% to 16%, I'm not really sure, but that 15% to 20% range holds true. What was the first part of the question? Sharon Zackfia - William Blair: The new store productivity.

As we said in aggregate, we're pleased with the new store performance. They are in line with our expectations as a group. Sharon Zackfia - William Blair: Then maybe separately, can you give us a broader update on the Internet initiatives and what you're seeing in terms of the shift of marketing dollars there and how it's impacting your business?

Well, I still think it's a little too early to tell on that. It's only been six months since we've done the shift. Obviously, we're pleased with the results so far. I talked about both the improvements in traffic on the web site and through the store. So, you know, the biggest thing for us is when somebody gets on our web site and are we able to educate the consumer on the web site and are we able to get them comfortable enough that it turns into a store visit? So a lot of what we have to track in terms of the change in shift in advertising is that conversion rate, how many people go on the web site; and of those, how many show up at the store? And then of the ones that show up at the store, what's the quality of that customer? So it takes a lot longer than six months really to measure that. I mentioned that we're pleased with our traffic increases and we have seen a traffic increase on the Web and we've also seen a traffic increase flow through to the store on a small percentage basis. So I'd just say so far we're very pleased with the results, but it's a little too early to really start putting specific numbers on the result. Sharon Zackfia - William Blair: How about the Auto Trader relationship?

Well, it's kind of all in the same package. When I'm talking about the changes we've made in Internet advertising, as we've talked about, we put all of our cars on AutoTrader.com and all of our cars on Cars.com and those events both happened at the same time. For the last couple of years, we've been pretty heavy in search engine advertising on both Google and Yahoo!. The difference this year is when we went to AutoTrader and Cars.com, we pulled largely out of newspapers. When I'm talking about the Internet and its impact on the business, really all those things are happening at the same time, which makes it a little bit more difficult to read. Sharon Zackfia - William Blair: Okay. Good first quarter, Tom. Dandy, have fun in Savannah.

Thanks.

Thank you, Sharon.

Your next question comes from Edward Ahruma – JP Morgan. Edward Ahruma - JP Morgan: Hi. Thank you for taking my question. I wanted to discuss a little bit some of your initiatives on the sub-prime business. I know that you mentioned that sales have declined there and I know that much of that's probably due to changes in drive. Have you made any other adjustments and how effectively can you attack that market?

Well, when we talk about the sub-prime and the difference from last year to this year, it mostly is drive. In terms of the offering for the consumer, we've always said what we want to do is give the consumer as many options as possible. And at the same time, we have to manage the relationships we have with the non-primes. Really, when we talk about non-prime and sub-prime and drive was really our only, what we would call sub-prime offering, the rest of the lenders that kind of play in that space are non-prime. We have expanded that base a little bit. We've added Capital One and Triad in the last 18 months, fully out to all the stores. But it's always our goal to find anybody who can come to the table, is willing to make the investment on the technology front to be able to work within our environment so they can take the electronic application and deliver it back to the customer in a timely manner, and we're looking for those unique approvals. We want lenders who can come in and add incremental sales without pulling too much out of the other lenders so that we can manage our relationship with all the lenders. So really, other than drive being significantly less than it was last year, and we'll lap that coming up here in the fourth quarter and it won't be anything that we'll discuss further, because there won't be enough to talk about. That's our goal with the non-prime world and we want to continue to evaluate any options that are available out there. Edward Ahruma - JP Morgan: Great. Just wanted to offer my congratulations to Dandy as well. It's been great working with you. Thank you.

Thank you.

Your next question comes from Mark Johnson - Principal Global Investors. Mark Johnson - Principal Global Investors: Good morning. It seems for the second quarter in a row your SUV sales coming off the CarMax lots have significantly outperformed the SUV sales coming off the new car lots for the OEM dealers. Is there anything specifically going on in your SUV business that might be different in terms of driving demand versus the new car lots?

Well, one important point to remember is last year's first quarter and second quarter were kind of off the norm for us in SUV sales. We had the gas price increase in the spring, last year's first quarter, which impacted our SUV sales, and then we had the Katrina impact in the second quarter last year, which dramatically impacted our SUV sales. So we've always done exceptionally well with SUVs and I think what you're seeing in the first and second quarter is the market has moved. We've adjusted down, as we normally would, and as a percentage of sales, it has picked back up to more of a normal range for us in the first and second quarter. It's more that last year's first and second quarter were unusual than this year's first and second quarter are unusual, in my estimation. Mark Johnson - Principal Global Investors: Okay. Thank you.

Your next question comes from Rod Lache - Deutsche Bank. Rod Lache - Deutsche Bank Securities: Congratulations, everybody, especially to you, Dandy.

Thank you, Rod. Rod Lache - Deutsche Bank Securities: Well done. Just a couple things. Are you seeing any regional difference in the comps, or are the regions sort of uniform in terms of their performance in the same-store base?

You know, there's always differences from region to region, we don't discuss them in any specifics. But, you know, in aggregate, we're very pleased with the comps. But of course, there's going to be regional differences all the time in running a business like this. Rod Lache - Deutsche Bank Securities: Okay. But are they very significant in this, or are they more significant than has typically been your experience?

You know, I think the biggest differences we see in comps, as you would expect from a new business is, it's more new stores compared to mature stores than it is region to region. If we have a region that has more new stores in it, then our expectation would be a little bit higher comps there because the stores aren't mature. So it's not necessarily divided by region, I think it's more divided by store maturity. Rod Lache - Deutsche Bank Securities: Right. You had commented in the past that sort of around this time you'd be seeing an acceleration in terms of your performance because of the maturity of the stores. Can you just comment on where you stand and, you know, from your perspective, is there any reason to expect a difference in performance as far as the same store comps looking out to next year?

I think when we've talked about that in the past we've talked more about how that relates to SG&A leverage than we have sales specifically. So, no, I don't see that as a big factor going forward. Rod Lache - Deutsche Bank Securities: Okay. All right. Thank you.

Your next question comes from Scott Ciccarelli - RBC Capital Markets. Scott Ciccarelli - RBC Capital Markets: A couple of questions. First, Tom, is there any way to kind of outline how much benefit you guys might be getting from the cuts in new car production that we've been hearing about and seeing? Obviously, as the promotional environment becomes a little looser out there, people have just kind of cut back on the car production. I would assume the next natural trade would be to late model used cars. But can you help us understand any of those dynamics a little bit better?

Well, I think as we talked about in the beginning, the fact that we were able to outperform or do exceptionally well both in an environment where -- last year, I mean new car sales were booming, particularly year-over-year and we did well. This year it's widely known that there is roughly a 20% decline year-over-year looking back at the second quarter and we were able to outperform in that environment also. A lot of the inventory cuts that everyone has been talking about really haven't flowed through yet. There was still an excess of inventory through the second quarter of this year across most of the OEMs and we were able to perform well in that environment. In terms of long-term, any time there's going to be a balance in supply and demand, I think it's better for us. I think it's better for everybody. It's easier to predict, it's easier to manage through, there's less blips. There theoretically would be less volatility, but I don't think those cuts have really yet taken effect to where we see a smoother inventory flow through the new car manufacturers; we haven't seen it yet. Scott Ciccarelli - RBC Capital Markets: So if I were to try and go back let's say 18 to 24 months ago then and try and figure out what happened during that period where your comps were running negative and business trends were a little bit tougher. How should we think about that period, then? I guess I'm just trying to understand that the different macro dynamics relative to your performance.

I think every time we have a change in the macro environment that impacts new car sales and that we get to look at how we perform, we learn something a little bit each time. We're a different company than we were 18 or 24 months ago in terms of our ability to manage through some of these peaks and valleys. So I think it's more that we've been continuously trying time improve our ability to manage through those environments. I'm not sure that you could go back 24 months ago, look at the environment and then make any prediction about that macro situation happening again and what it would do to us. I think we're better positioned to manage through it than we used to be -- which doesn't mean that we won't be impacted by any type of macro event, particularly on that front. Scott Ciccarelli - RBC Capital Markets: Related to that, if for some reason -- macro, seasonal, whatever -- we do start to see increased volatility, you know, at least relative to your plan, could gross margins start to take a hit, then? Because it sounds like the fewer markdowns have kind of led to better gross margin performance. Does it stand to reason the opposite could also be true?

It does a little bit, Scott, and we've seen a little bit of that in the past. When we talk about the first half of the year and our strong margin per car performance, we've talked about the smoothness and how it has helped us in terms of taking fewer markdowns in order to sell our product. So it kind of goes the other way, that if there's more volatility there we'd see a little bit more of a bubble impact going through our inventory which would cause more markdowns and could have a little bit of a negative impact. But what I really think that we've been trying to work on is positioning ourselves that even if that was to happen, we would be able to outperform the industry. Scott Ciccarelli - RBC Capital Markets: Okay. Fair enough. The last question is, something that Austin used to talk a little bit about was the elongated maturity curve of the stores and some of your earlier stores were still comping positive and this is an old data point, but it's something he used to talk about. Is there any better way to think about the maturity curve of your stores at this point? Obviously, the white paper you put out is a little long in the tooth given the fact that as you said, you're a little bit of a different company today. What's the best way for us to think about the maturity curve of your stores?

Well, I think it's both an old data point and it's still the same data point. The reason is despite the fact that we are a bigger company and we're more mature, we're still very immature in terms of just when you look at the buying cycle of cars. Even in Richmond, where we've been open for going on 14 years now, we've only been through three or four buying cycles so more than half of our stores are still less than five years old. They haven't even been through a second buying cycle. I think what we're pretty comfortable with is five years isn't the end maturity curve but as far as where does it go, it's still too early for us as a company to tell. We're fairly big in terms of revenue, but we do only have 70 locations with which to study performance on and they've only been open for a relatively short period of time. That period of time is even shorter when you look at buying cycles. It's not like a grocery chain or a traditional retailer where you get to see your customers every couple of weeks. We see them once every three years. Scott Ciccarelli - RBC Capital Markets: All right. Okay. Thanks a lot, guys.

All right. Thank you, Scott.

Your next question is from Matthew Fassler - Goldman Sachs. Matthew Fassler - Goldman Sachs: Thanks a lot. Good morning. First question relates to the metric of gross profit per car. It seems like what you're seeing is driving that number up as the combination of strong SUV sales and the fact that you've achieved some modicum of margin stability and sales trends have been more consistent. This is the strongest run, it looks like, of growth in gross profit for car that you've had in a number of years. Is there anything that you could see kind of getting in the way of that in terms of your SUV sales relative to the market or your ability to manage the stability of business through the quarter?

Well, first of all, Matt, we did not attribute margin to SUVs. We contributed higher average retails to SUVs which, as you know, doesn't translate necessarily to margin per unit for us. So the higher SUVs and the higher margins are unrelated. The smoothness of the market over the last six months is what we have talked about delivering the higher margin and good comp sales don't hurt either, because they also help your turns. If we can move our inventory a little bit quicker and sell it in the early stages before we make a markdown, it's going to help margins. If you say what do I see for stumbling blocks, there's still some volatility out there that I think we haven't seen flow through. Scott mentioned it earlier, with all the cuts that are coming from the different manufacturers, we'll have to see how rational everybody behaves and then what the impact is on the macro environment and then we'll have to try to manage through it. Do I think there's some potential there for it to impact our ability to absolutely maximize margin per unit? Absolutely, but I think we'll be able to continue to outperform the industry as we've said before. Matthew Fassler - Goldman Sachs: Tom if you could just remind us, how do SUV margin rates typically compare to those of cars?

You know, we don't manage our margin by segment like that. Our margin is driven by a number of different factors. Although that may be one of them, it's not the biggest driving factor in differentiating margins. o it's not like we do way better on SUVs than we do on minivans. There are certain minivans, depending on the miles and the source and what type they are and the availability and the supply and demand that we make terrific margins on and there are certain ones that we don't and SUVs are no different in terms of that. Although we look at it, we don't see the biggest drivers of margin differences coming from class of vehicle. There are many other factors that are more important. Matthew Fassler - Goldman Sachs: Fair enough. My second question relates to CAF and to the series of one-time gains that we've seen over the past several quarters. In terms of how you book these and when you decided to record the profits, does that reflect sequentially improving delinquency and charge-off trends, or is it simply a question of adjusting those on a gradual basis and booking those more gradually than you're actually seeing the improvement from your borrowers?

I'm going to let Keith answer that one, Matt. Matthew Fassler - Goldman Sachs: Great.

I mean the answer is that each quarter we look at each poll and the largest amount of the adjustments usually comes for the more recent poll because we're setting the loss rates based on how we're underwriting. As we gain more experience with each poll, once we gain enough experience, you get more and more confident, the more seasoning a poll has and what it's ultimate loss rate's going to be. So while we tweak each poll as it matures, each quarter we take our best estimate about where we think that poll’s going to ultimately end up and book, whether it be favorable or unfavorable, an adjustment reflecting our best forecast. So the truth is, is they have actually continued to outperform our expectations, even on the older polls, but the largest dollars coming through are the later polls that had the opportunity to have the environment where we had favorable recoveries and just an overall favorable environment. I think throughout the industry as far as payment cycles potentially go back to normal and basically we're looking at what point in time in the future do you think it's more likely to get back to a normal loss rate expectation, a normally recovery rate expectation versus something that's going to happen tomorrow. So it's a little bit of a crystal ball, but we're taking our best shot every quarter.

What I'd add to that is that we have always managed CAF as an integrated piece of the total consumer offer. CAF is not, as a separate entity, it's not an entity that has just stayed with the same terms of how we approve loans and how we manage that portfolio. It's evolving all the time like any other bank would. We're always trying to figure out ways to drive incremental business, which changes the look of the portfolio. Although it still remains a prime portfolio, there are changes that are happening all the time and the deals that we originate in the last six months don't look anything like the deals we originated 18 months ago and they're all flowing through at a different stage of their life and it's a balancing act.

That's especially true this year given the fact that we implemented our third new scorecard that's totally independent and we're absolutely trying to take the knowledge and the learnings that we've had from the prior polls and as Tom said, spend that, obviously judiciously, without taking significant risk and driving incremental sales. Matthew Fassler - Goldman Sachs: Understood. Dandy, best of luck to you.

Thank you, Matt. Matthew Fassler - Goldman Sachs: Bye-bye.

Your next question comes from Michael Novak - Frontier Capital. Michael Novak - Frontier Capital: First off, I really appreciate the strong results. My question relates to the wholesale business. Would you expect that to grow in line with unit growth over time, or would you expect it to grow somewhat faster as your auctions gain popularity with local dealers? How should we think about the growth in that business? Thank you.

It's roughly more driven by unit growth than it is popularity with the dealers, because regardless of how many dealers show up, that doesn't change what we buy from the consumer and the only cars that we run on the auction are the cars that we buy through the appraisal link at the store of that mix that does not meet our retail parameters, or we can't bring it up to our CarMax standards. So the volume in our auction will be driven by total store growth, total unit growth, and our ability to drive that buy rate. We're more comfortable with pushing it when we can get better price realization, but it's more driven on the front end than it is the back end. Michael Novak - Frontier Capital: Any more thoughts about the kiosk business and what that could mean both for sourcing cars for your stores as well as the auction business over time?

You mean the CarMax buying center? Michael Novak - Frontier Capital: Yes.

Well, as we've said, we have one of those open and we will go out and do a couple more before we make a decision about that as a concept. It's not a very expensive thing for us to go do, as we have discussed in the past. But having one store, one unit open for four months is not enough for us to really make a long-term decision on. So far we're pleased with the results and we'll go do a couple more in a couple different markets to try to continue to learn. Michael Novak - Frontier Capital: When would you expect to open those?

We haven't got to that yet. We're working on it right now I think, 12 to 18 months, I would say we'll get something open, but we'll see. We’ll let you know as soon as we know.

Your next question comes from Brad Thomas - Lehman Brothers. Brad Thomas - Lehman Brothers: Thank you. A couple questions if I may. First of all, on the SG&A line, I know that last quarter you had had a little bit of a benefit from timing of expenses. Just wondering if there was any impact one way or the other for this quarter and anything that we should look for in the third quarter or fourth quarter?

I talked about that a little bit earlier. The timing we talked about in the first quarter is really more first half-second half. The timing of some of those items we'll see in the second half. Brad Thomas - Lehman Brothers: Okay. Great. I know having added the two additional non-prime partners in the back half of last year had benefited you the last couple of quarters. Could you quantify any benefit that you saw this quarter? And then maybe stepping back at this stage, do you think you really optimized your portfolio of lenders, or do you think there'll be more opportunity going forward?

I don't know that we'll ever be satisfied. I think that we've optimized our portfolio of lenders. I think anybody that can come in, add incremental sales, make the technology investment that I talked about earlier, we're happy to have. In terms of the addition of the additional non-primes, it's probably largely offset the drives loss. So, you know, that's about all I think we can quantify on that. Brad Thomas - Lehman Brothers: Looking at how your sales are breaking down and the types of customers coming into your stores, do you think you're seeing any maybe trading down from customers who otherwise would have been looking for a new car, or do you think it's maybe more just taking share in maturing your newer stores?

I think a lot of our business from the very beginning has always been people making a trade-off from a new car down to a used car. There's a big difference in average retail price. Average retail for new car's around $24,000 ours was $17,500 or so this quarter. So there's still a big spread between new and used cars, so you're always going to see some of that. But when you see comp sales like we have, it's clearly also a share gain. If you look at our averages for the last five years, not including this first half of this year, our average comp sales for the last five years have been positive 5% and the average of the reported publicly traded used cars have been negative 4% over that same time period. So I think share gain is something that we also think is a factor. Brad Thomas - Lehman Brothers: Okay. That's very helpful. Well, congratulations on a great quarter and Dandy, best of luck to you.

Thank you.

Thank you.

Your next question comes from Bill Armstrong from CL King & Associates. Bill Armstrong - CL King & Associates: A couple questions focusing on the second half of this year. Tom, earlier I think you said that you were expecting lower wholesale profits for the back half. Was that just wholesale profit per vehicle or aggregate wholesale gross profit dollars?

Per vehicle. Bill Armstrong - CL King & Associates: Per vehicle?

Yes. That's just largely driven by the environment, our expectations about the environment. You know, last year second half I think there were a number of different factors there that kind of slowed the depreciation curve at wholesale and I think this year's looking a little bit more normal and that's why we said at that time last year we didn't expect to be able to repeat it. Bill Armstrong - CL King & Associates: The timing of the expenses that you mentioned shifting from the first half to the second half, two questions: what's the nature of those expenses and how much are we talking about?

Well, we talked about at the end of the first quarter, it's only $2 million or $3 million is what we're talking about into the second half, so it's not some big dramatic thing that you should be looking for. Bill Armstrong - CL King & Associates: Got it. Backing into the implied second half guidance would be $0.52 to $0.62 a share, you did about $0.63 in the second half of last year. Now I guess you're going to be restating those numbers for stock-based compensation, so the $0.63 you reported last year in the third and fourth quarter would be somewhat lower?

Yes. Bill Armstrong - CL King & Associates: How much should we adjust or backdate our models for that?

It's about $0.57, Bill.

Did you get that, Bill? Bill Armstrong - CL King & Associates: Yes, $0.57. Got it. Okay. All right. That's all I had. Thanks a lot.

Okay. Thank you, Bill.

Your next question comes from Hardy Bowen - Arnold & Bleichroeder. Hardy Bowen - Arnold & Bleichroeder: The close rates for mature stores, how are those going and how are the close rates going for new stores, just directionally?

Well, Hardy, I think you know us a little better than that. We don't generally talk about our close rate. I said in the beginning that we had solid store execution in the second quarter, which we also said in the first quarter as well. So for the first half of the year we're very pleased with the execution in the stores as a group. Hardy Bowen - Arnold & Bleichroeder: That implies close rates marginally would be up, or directionally would be up?

It doesn't imply anything, Hardy.

We're very happy with our store execution through the first half of the year, Hardy. Hardy Bowen - Arnold & Bleichroeder: All right. Is there any reason to believe that average price per vehicle that the mix is not going to continue to shift in such a way that this will go up or do we believe that it's going to start to slow down?

I think with just inflation 3%, 3.5% you're going to get that in your average selling price every year. I think the year-over-year differences that we talked about have been largely driven by mix. One of the things I did mention earlier is we've seen a little bit more of a movement for us in luxury cars and I actually think that that's a reflection of the power of CarMax.com and the power that our brand is bringing to the marketplace as we continue to build on it. I think people are more comfortable with CarMax as a brand. I think people are more comfortable with CarMax as a retailer of higher quality product and then it's available to all of our customers on the Internet so they can move it around to different markets. We've clearly seen luxury as a segment in total move up very gradually over a long period of time and I think that's reflected in the way customers feel about the offer in general. Hardy Bowen - Arnold & Bleichroeder: And availability of cars, inventory probably has something to do with this. I mean luxury shoppers really like to get whatever they like to get.

Well, they're a lot more specific, generally. You know, somebody that wants a black Porsche probably won't buy a red one. But somebody that probably wants a black Nissan Sentra would buy a red one if it was $500 cheaper. Hardy Bowen - Arnold & Bleichroeder: Right. How many stores did we have planned to open in L.A. for 2007?

We haven't announced it yet.

We haven't announced that yet. Hardy Bowen - Arnold & Bleichroeder: But I guess roughly we're hoping for two?

We haven't announced it yet. Hardy Bowen - Arnold & Bleichroeder: Okay. Dandy, it's been a lot of fun working with you.

Thank you, Hardy. Hardy Bowen - Arnold & Bleichroeder: Have a good retirement.

We have time for one more question.

You have a follow-up question from Matt Nemer - Thomas Weisel Partners. Matt Nemer - Thomas Weisel Partners: Hey, just a quick follow-up on the wholesale business. Can you remind us of what the dealer fees are in that business and have there been any changes over the last year or two?

I don't think we've given the specific on our dealer fee, but what I'll tell you about the fee that we charge dealers a fee when they buy a car from us. It's standard in the industry to charge a fee when you buy a car and it's graduated based on the price of the car. So somebody that buys a $500 car is going pay one fee and somebody who buys an $8,000 car is going to pay a different fee. Our average selling price is around $4,000 and we have been able to move the fee kind of along with inflation and kind of in line with keeping ourselves very competitive in the auction environment. So we look at that business as a separately run, very competitive business with a different set of customers that we have to take care of, just like we take care of our retail customers. So we're going look at that fee always in terms of how does it look against the competition and how do we make CarMax the most attractive place for those dealers to come and buy cars. Matt Nemer - Thomas Weisel Partners: Great. And to follow-up on that, given that you look as this as a separately run business, and given the incremental margins on running additional vehicles through that lane, would you consider opening this up to other consignors?

When I say it's separately run, I didn't say it's not unbelievably integrated with the rest of the total consumer offer. Those two things together are what really make it such a powerful piece of the total puzzle. Adding additional product in from the outside world does not mean anything about the price realization compared to what we would have in the car. The only opportunity there is how much could you charge that person for a fee, but they're going to have in the car whatever they have in the car and they're going to want to get that out of it so, and it would add a whole different level of complexity to the business and I think it would take away some of our competitive advantage. So at this time, that's not something that's on the landscape for us. Matt Nemer - Thomas Weisel Partners: Got it. Thanks again.

Well, thank you very much, everyone. I appreciate you calling in and we'll see you next quarter.

This concludes today's conference call. You may disconnect at this time.