Katharine Kenny – Vice President, IR Tom Folliard – President and CEO Keith Browning – EVP and Chief Financial Officer

Simeon Gutman – Credit Suisse Sharon Zackfia – William Blair Jaison Blair – Rochdale Research Himanshu Patel – J. P. Morgan John Murphy – Banc of America/Merrill Lynch Craig Kennison – Robert W. Baird Matt Fassler – Goldman Sachs Dan Gallatin – Deutsche Bank Brian Nagle – Oppenheimer Scot Ciccarelli – RBC Capital Markets William Truelove – UBS Bill Armstrong – CL King & Associates Tricia Gill – Wells Fargo Securities Scott Stember – Sidoti & Company

Good morning. My name is Tanya, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quarter One Fiscal Year 2011 Quarterly Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I will now turn the call over to Ms. Katharine Kenny. Ma’am, you begin your conference.

Good morning. 104 in Richmond today. I’m Katharine Kenny, Vice President of Investor Relations at CarMax. I know you all want an update on the weather here. I’m also pleased to announce that CarMax was added to the S&P 500 as I’m sure you’re all aware. Thank you for joining our fiscal 2011 first quarter earnings conference call. On the call with me today as usual are Tom Folliard, our President and Chief Executive Officer; and Keith Browning, our Executive Vice President and Chief Financial Officer. 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, 2009 filed with the SEC. One last comment, I think you will notice today that we have shortened Tom and Keith’s prepared remarks. Our reasoning was to reduce the redundancy of information readily available in the press release and focus more on questions from our conference call participants. Again, thanks for joining. I’ll turn the call over to Tom.

Thank you, Katharine. Good morning everyone. Well, we’re pleased to report a 9% used unit comp, used unit comp growth in the first quarter of fiscal 2011. This was driven primarily by an increase in our customer traffic. On a two-year basis our comp store unit sales trend improved sequentially from a negative 14% in the fourth quarter of fiscal 2010 to a negative 8% in the first quarter. Now, let me highlight some of our key achievements for the quarter. Year-over-year we improved used vehicle margins by over $200. We delivered both strong sales execution and strong inventory turns. Our wholesale unit sales grew by 52% and our buy ratio, which is percentage of cars that we appraise, how many of those we buy was over 30% for the quarter, and we also increased wholesale gross profit per vehicle. In addition, CarMax Auto Finance had better than expected quarter which Keith will provide a little more detail in a moment. Our notable increase in used vehicle gross profit per unit was due to a variety of factors, including greater self-sufficiency, which is the amount of inventory that we retail that is sourced through our store appraisal lane. Also as you know, the dramatic wholesale price appreciation we saw last year represented a substantial tailwind for our gross profit per used vehicle and it continued to support our gross profit during the first quarter, although to a lesser extent. Other factors supporting the increase in gross profit were our reduction in reconditioning costs, which we have talked about previously and once again strong inventory turns. Now, I’ll ask Keith to comment on CarMax Auto Finance results. Keith?

Thanks, Tom. Good morning. As you are aware, this quarter was our first quarter after adopting the new accounting rules for CAF, which require us to account for term securitizations as secured borrowings as opposed to accounting for these transactions using gain on sale accounting. As expected, our quarter was strong due to the historically high spreads between rates charged to consumers and our funding costs, but it was also positively impacted by better than expected trends in net charge-offs. Lower charge-offs along with record high recovery rate of nearly 56% caused actual losses to be approximately 30% below our projections and significantly below the trends we’ve been seeing over the last 12 to 18 months. All of the reasons for these loss trends can’t be known but we don’t believe they were unique to CarMax. We believe other companies are seeing improved loss performance as well as better recovery rates due to the high wholesale vehicle prices. This strong performance led us to lower our loss reserves for future periods. The combination of better loss performance and lower reserves positively impacted net earnings by approximately $0.03 per share this quarter versus our expectations. As you know, we provided one-time CAF guidance at the beginning of the fiscal year to assist investor with the transition in the securitization accounting rules. However, we will neither be providing nor updating that guidance on a going forward basis, as is consistent with our current earnings guidance practices. At CAF we continue to test rate sensitivity and as a result we did reduce rates to some customer segments later in the quarter where our tests indicated it made sense. Our 90-day agreement with Santander was renewed at the end of May with more favorable terms, consistent with the current industry profitability. It will now be automatically renewed for 90-day periods unless terminated in advance by either party. During the quarter we entered into a second warehouse facility that renews in February of 2011. Our total capacity remains $1.2 billion, but we believe staggered renewal dates help spread risk and provide greater flexibility. Overall, third-party finance fees were lower, reflecting subprime penetration that was almost 8% of sales, compared to approximately 4% in last year’s first quarter. We believe this is partially a result of lending standards on our non-prime lenders that are still tighter than pre-recessionary levels. However, we also believe that the continuation of Santander’s positive experience with CarMax and our unique origination channel have resulted in an increase in both the quality and the volume of their approvals. Now, I’ll turn the conversation back to Tom.

Thank you, Keith. I’ll talk about SG&A for a minute. After adjusting for the favorable litigation settlement in last year’s first quarter, SG&A this quarter increased by approximately $13 million, a 6% increase over last year, despite the 9% increase in used vehicle comps. The majority of the increase in spending was related to variable selling expenses, advertising and costs linked to this year’s store opening, such as pre-opening and relocation. As we previously stated and assuming no economic deterioration, we will continue to invest in some key initiatives related to carmax.com, as well as, several other IT projects and additional training for our associates. Also, as you know, our plan during the first half of this year was to open three stores that we previously completed construction on, but had refrained from opening during the recession. I’m pleased to report we opened our Augusta store in May, which would have opened in the first quarter and just last week we opened up both Dayton and Cincinnati, to complete our opening plan for this fiscal year. At this time, Keith and I would be happy to take your questions.

(Operator Instructions) Your first question comes from the line of Simeon Gutman with Credit Suisse. Simeon Gutman – Credit Suisse: First, Tom, on the used comps, is it possible to maybe quantify how much was driven by some of the increased credit availability. I know you mentioned the penetration at least in subprime was better but how much of that ended up getting converted and helped drive the topline?

Probably not very much at all, because you remember part of Keith’s comments on the subprime increase was that some of the third-party lenders had tightened up some, so I think it’s probably a little more of a shift than it is an increment. So I don’t think very much of the 9% has anything to do with credit… Simeon Gutman – Credit Suisse: Okay.

I’d mention that, mostly for us in the quarter it was almost all customer traffic. Simeon Gutman – Credit Suisse: Right. And as far as that traffic went, I mean, without commenting month-to-month, which I’m not sure you typically do, can you just say whether there was a steady flow throughout the quarter or was it variable?

Yeah. You were right. We don’t comment month-to-month and I’d just tell you that for the quarter, from the beginning to end, it was mostly customer traffic increase that delivered the 9%. Simeon Gutman – Credit Suisse: Okay. And then second, which I’m sure you get a lot of in a different way, just on the gross profit, where we’re at today and maybe starting -- I’m curious if you’re starting to feel that there is something more structural here, I mean, given the tight supply of late used vehicles out there. And you mentioned some of the cyclical things but just curious if you can give some more color on that?

Well, there’s a number of different things that go into our gross margin. Clearly, the wholesale appreciation is a big factor, although it’s not been nearly as pronounced this year as it was last year. So it did help some this year but not nearly as much as last year. I mentioned self-sufficiency. We’ve talked before where we make a little more money when we buy the car. When we sell a car that we source through the appraisal lane and that number went up for us and that’s a combination of traffic and our buy rate being strong for the quarter. So that helped in the quarter. And then, we talked about reconditioning cost savings in the past. We said at the beginning of this year we now achieved a $200 cost savings, while at the same time raising our quality. So really that’s $200 of margin availability where we don’t actually have to raise our price to achieve additional margin. We believe now with our price perception studies that we have very positive price perception from our consumers and in fact, our price perception today is stronger than it was pre-recession. So we feel, okay, about where the margins are, but as I’ve always said, we’re going to manage it quarter-to-quarter and we’re going to try to optimize both sales and profitability. But there are a number of different factors that go into our ability to achieve strong margins. Simeon Gutman – Credit Suisse: And are you still of the view there will be a reversion at some point or you just not expecting that, because in the past, I think, you talked about maybe this is what it’s been historically and we don’t expect them to stay at these levels. Is that still the view?

We’re still of the view that we have, that there’s so much volatility and so many different factors out there, that we really can’t say, what we, we really don’t know what’s going to happen going forward. But what I can say is, we feel very confident in our ability to manage and try to optimize both our sales and profitability. And I do think, we’ve been in a unique circumstance, although it’s been extended longer than we thought it would go, in our ability to achieve strong margins. So I really can’t say, but I just feel very confident in our ability to manage through it. Simeon Gutman – Credit Suisse: Okay. And then last question for Keith. I know you won’t update the guidance on CAF, but mentioned in the press release the annual CAF income annualized was about 5.5%. I think the midpoint of your guidance it was implied about 4% and then, there were a couple things you mentioned here and there. But even if you look at the collateral spreads that you publish monthly, some of the older securitizations for only 5% or so and now you’re at 5.5%. So, I guess, the only question that I’m hoping you can answer there is, what -- how sustainable are these lower charge-offs going forward, at least what is your expectation of how sustainable they are?

Well, the lower charge-offs as I said were 30%, which is significantly lower than our expectations. So quite honestly, that is something that’s difficult to predict as well. And our forecasting ability obviously takes into consideration the more recent performance, but it doesn’t project that level of outperformance going forward. And if we knew all the specific reasons why it was significantly ahead of our expectations, we would obviously be able to do a better job of forecasting the future. But it’s really just very difficult to measure that. And so I can’t tell you quite honestly whether they’ll continue -- what level they’ll continue going forward and I think there’s just a lot of volatility in the economy that could cause them to go the opposite way, just as quickly as they came back.

We’re sitting on our best guess right now otherwise we would have adjusted it further.

Obviously. Simeon Gutman – Credit Suisse: Right. But when the initial guidance was laid out, I mean, the loss rates were definitely higher than they were today. But they were starting to fall but it seems maybe you also, I guess, I don’t know if it was conservative or not, just the way it was, the numbers that were initially plugged in were reflective?

Okay. Our loss rates that were baked into the forecast obviously baked into and included the tightening that we’ve done over the last year. So as you look at the entire pull of receivables, we’ve done significant tightening at CAF and therefore expected much lower loss rates on the more recent pulls of securitizations. This is really the combination of all of the pulls and how they’re performing, and we saw both a shift downward in delinquencies and losses that were unprecedented based on normal seasonal factors. Simeon Gutman – Credit Suisse: Okay. Thanks.

Your next question comes from Sharon Zackfia with William Blair. Sharon Zackfia – William Blair: A couple of questions on, Tom, you mentioned, you’re getting more cars in the appraisal lane for the retail inventories. Can you give any kind of numbers around that, where you are relative to the historical, I think, it used to be a little bit over 50% you had sourced for appraisal?

Yeah. You know, for a good stretch of years, going back several, we were over 50%, to come to the appraisal and then we had stretch of a couple years, where we saw that number decline, which we talked about frequently on the call. We probably reached our all-time low down around a third and we’ve come back from there, but we’re still below 50%. But we’ve made a comeback from somewhere down around 30%, closer to 40% now, but we are still not back to a half of 50%. Sharon Zackfia – William Blair: And was that the biggest driver in the gross profit per car, because you did mention of course in the press release and I didn’t know if that was an order of magnitude?

It was a big driver. Sharon Zackfia – William Blair: Okay.

You know, it’s hard to quantify some of the other factors particularly appreciation is really difficult to quantify. But, that one we have a little better handle on analytically and it was a big factor. Sharon Zackfia – William Blair: Okay. And then, secondarily, I know you guys always do testing as to the price elasticity of demand. Are you starting to see any signs where if you did, to express profit per car down a little bit or took a little bit less that you would stimulate more demand or is that still the case where you’re not seeing that kind of curve in the demand of the business?

Yeah. That’s another really tough thing to measure that I think we may never understand completely. But as I said, our goal is to kind of, is to optimize sales and profitability. We feel like we did that pretty well in the quarter when you factor our inventory turns as well. The faster we turn our inventory, particularly once it gets out front, the less markdowns we make, and so there’s a number of different factors there. But we’ll continue to test going forward. So, I mean, we ended up where we did. We’re pretty happy with it. I mentioned the reconditioning cost is a really big number, that $200 a car is a lot of margin availability for us to work with. And as I said, our price perception data with our consumers is that we have better price perception today than we did before the recession, so all indications are that we feel pretty good about our pricing. Sharon Zackfia – William Blair: Okay. One last question for Keith. Keith, the Santander renew at the same term every 90 days or is there some sort of renegotiation every 90 days?

I think we’ll revisit rates with them whether how much they pay us depending on what the current market yield provides. So I don’t expect that to be a permanent number. And that’s why it’s favorable now is obviously we’re all experiencing very favorable spreads between consumer rates and our cost of funds and they stepped up and recognized that, and when it goes the other way then I would expect that they’re going to try to negotiate that in the other direction. Sharon Zackfia – William Blair: Okay. Great. Thanks.

Thanks, Sharon.

Your next question comes from the line of Jaison Blair with Rochdale Research. Jaison Blair – Rochdale Research: Hi. Thank you for taking my call. I’m hoping to get some additional color on the CAF loan allowance and I guess, how much of it applies to the current period and how much to future periods? And I’m wondering if the right way to go about that is to ask you what your ending allowance for loan losses is, because I know what your starting allowance was and the provision during, provision you laid out in the quarter?

Yeah. The ending allowance was just over $50 million and it really is a look forward for all loans on our books for the next 12 months, which is the standard industry convention. Jaison Blair – Rochdale Research: Okay. So essentially there would be -- so what it would be 8 million bucks minus the 9 million, so it’s, what, roughly 7 million related to future or what’s the right way to think about that?

Well, the way to think about it is, is that, if you looked at the beginning balance which we had in our K, we obviously were looking at 12 months and then at the end of the quarter for those loans, we have to then look at the next 12 months. In addition, you have to take the originations that we had during the period and say that we have to then accrue a loan allowance for all new originations as well. So to really come -- you have to factor that in order to really come up with and that’s how we came up with our $0.03. So it’s basically that if you factor those in and you would have expected an increase in loan allowance by some amount and then when you look at the ending balance, seeing that it went down and declined, that gets you into the magnitude that we were talking about. Jaison Blair – Rochdale Research: Okay. Terrific. And then on SG&A, can you provide some color on how much of the SG&A increase came from investments in technology and other infrastructure investments and how much from increasing advertising and how we might think about those numbers going forward?

Yeah. When we -- when I covered SG&A, I talked about it kind of in the order of magnitude. And so with a 9% increase in used vehicle comps, if you adjust for the -- if you adjust for the litigation settlement last year, our SG&A was only up 6% and our sales were up 9%. And in the order of magnitude, variable selling expenses, which is commissions and all the other things that go along with delivering a 9% comp and then advertising would have been second and pre-opening and relocation. So some of the spending as it relates to the IT initiatives was kind of at the bottom of the list in terms of order of magnitude… Jaison Blair – Rochdale Research: And…

But really, once you adjust for litigation, it’s a less of an increase than what our sales increase was and you throw variable selling expenses and advertising in there and explains most of it. Jaison Blair – Rochdale Research: Okay. And you would expect the investments in infrastructure to remain similar kind of a similar order of magnitude going forward?

Well, it’s really difficult to talk about the timing of that, when -- really when we say at the beginning of the year we’re going to spend money on infrastructure on technology, we’re really talking about over a longer period of time and really in comparison to the year prior when we really stopped lots of our investment spending due to the recession. So it’s just difficult to comment on the timing. We didn’t spend that much this quarter but I look at it over the next couple of years as opposed to the next couple of quarters. Jaison Blair – Rochdale Research: And I guess as a last question kind of as a follow-up. It seems as though the two Ohio stores may have been, I guess maybe accelerated to some extent. Do you think there’s a possibility for some of the stores that you’ve been looking at for your next fiscal year to creep into this fiscal year?

No. We didn’t accelerate those at all. We said we would open all three stores in the first half of the year and we did. Remember, those stores were built and ready to go. So we kind of couldn’t open them fast enough because we were already paying the rent. Jaison Blair – Rochdale Research: Okay. Terrific. Thanks so much.

All right.

Your next question comes from Himanshu Patel with J. P. Morgan. Himanshu Patel – J. P. Morgan: Hi. Good morning. Couple questions. Was there a big sequential improvement in subprime penetration rates?

Sequential from the fourth quarter? Himanshu Patel – J. P. Morgan: Yeah.

No. There would have been a decline.

Well, no, from – there would have been a decline.

Yeah. It wasn’t a significant change, just a slight decline sequentially. Himanshu Patel – J. P. Morgan: Okay. And do you guys have a view on where that 8% number sort of lands by the end of this year?

Well, it traditionally it’s been very seasonal and peaks in the fourth quarter related to tax returns and some of that actually then carries over into the first quarter. So look, what we would hope is that our tier 2, our non-prime players will actually get back and get more aggressive and that number will come down as they get more confident about the economic circumstances going forward. But the good news is that Santander is there for us, they’ve been a believer. I think that they really do appreciate the unique origination model and we’re happy to have them as a partner because those are sales we wouldn’t get otherwise.

Yeah. One of the things to always keep in mind, is whatever percent of sales we have that is subprime sales, those are always incremental -- 100% incremental sales for us because the lender, the subprime lender doesn’t get a chance to look at that application until all the other lenders have declined it. So whatever percent we report as subprime sales is always 100% incremental in our mind. Himanshu Patel – J. P. Morgan: Okay. And then, Tom, earlier you gave kind of the four drivers on the gross profit increase. Can you just help us a little bit more on how to think about that, if you sort of subscribe to the view that used vehicle prices were going to trend sideways from here onwards, what would happen to your gross profit number? Should we think about it falling back into that 1,800 to 2,000 range or is there still enough there on other factors like reconditioning costs and inventory turns to suggest that it wouldn’t fall perhaps that much?

You know, I don’t know how many quarters we can say it’s going to fall and it doesn’t and still keep saying it, but there’s just too much volatility out there in a lot of those other factors for us to really say. The wholesale appreciation has been such a big factor over the last two years and it’s so unpredictable, it’s impossible to say what’s going to happen there. The reconditioning dollars are real. We know we’re getting those savings and the shifting in -- that we mentioned in self-sufficiency is also very difficult to predict for us, although clearly year-over-year we had a benefit from that. So we’re not really in a position to try to predict too much going forward other than to continue to say we’re going to do our best to optimize both sales and profitability. And we’ll continue to test elasticity by running pricing tests. We’ll do it in different markets. We’ll do it in different stores. We’ll test different margin levels and if we think we get the sales back then we lower our prices to get those sales. Himanshu Patel – J. P. Morgan: Thank you.

Your next question comes from the line of John Murphy with Banc of America/Merrill Lynch. John Murphy – Banc of America/Merrill Lynch: Good morning. First, a point of clarification. Tom, just to make sure I’m clear on this. You think there’s no change in your close rates sort of year-over-year or sequentially and then the 9% increase in same store units was purely driven by traffic?

Well, our close rate has been strong for the last year, going into the really, actually a little longer than a year, lapping the first quarter of last year. We improved our conversion last year’s first quarter. This year, we were relatively flat but we consider it to be a very strong conversion number. So yeah, it was relatively flat but it’s a big strong number for us, especially with some tightening in credit that we’ve seen out there because that’s kind of a hurdle you have to overcome and in this particular quarter just most of our comp sales were driven by traffic. John Murphy – Banc of America/Merrill Lynch: Great. And then, second question for you, Keith, I mean, it looks like the credit pools or the loan pools are performing very well better than expected, really across the credit spectrum. Is there any potential that you guys start increasing your volume there, significantly, maybe dipping a little bit lower into the credit spectrum because the performance is very good. Is there the ability to potentially ramp up volumes in CAF?

The answer is we would love to do it and we intend to do it as soon as we believe that the credit -- the capital markets will let us do it. And meaning that right now I think the rating agencies are still relatively conservative in their outlook. And then when we go to the public market, obviously what we don’t want to do is end up having to hold a big chunk of these sub-bonds. But we absolutely believe that this is good business. It’s profitable business and assuming we can finance it, we’ll be there as soon as the market lets us. John Murphy – Banc of America/Merrill Lynch: Regardless of what the credit agency is saying, we saw a record issuance of almost a record issuance of auto ABS in the first quarter $21 billion, spreads are incredibly tight. The market seems to be there. I mean, are the credit agencies just really behind the ball on this?

As I said, they’re fairly conservative at this point. And having gone through what they’ve gone through, it’s understandable to some extent. John Murphy – Banc of America/Merrill Lynch: Okay. And then lastly, Tom, just it seems like the used car market is incredibly strong when we look at pricing, wholesale seems to be going very well for you yet volume’s only up 9%. That’s a good number but given the maths improvement we see in pricing in Manheim, it doesn’t really seems year-over-year. It seems like there’s some place in the used car market where demand is very, very strong. Are you seeing that someplace lower in the spectrum where you guys aren’t playing or is it just that supply is so tight in the used car market that that’s driving up pricing? Just trying to understand the dynamics of the real strength that appears to be in the market that’s not showing up in volumes.

I think supply is really tight and there’s a lot of strength in the market. I just think one has yet to outpace the other. So, although the market’s back, it’s just not back to where it was two years ago. I still don’t think demand is there from two years ago. I still think consumers are nervous about going out and signing up for a loan, almost everything we sell requires a loan. We know, in addition, we’ve seen without us doing anything, just through price appreciation, we’ve seen a couple thousand dollars of appreciation. If you look at our average, retail has been gone up and almost all of it is from price appreciation. So the demand is clearly there -- but the supply is short enough that we have a bit of an imbalance. But just as far as we can tell, demand’s just not back to where it was pre-recession. We talked about sequential changes and we’re still 8% off of where we were two years ago. John Murphy – Banc of America/Merrill Lynch: Just one last question. In your opinion, is that really just a confidence issue, I mean, in the volume -- you know, for the consumer to get these volumes back up? What do you really think is the holdback here? We’re seeing miles driven improve. I mean, demand is kind of fundamentally there. What’s sort of the last factor you’ve seen to really kick start this volume increase?

Yeah. I mean, my opinion is it’s still that there’s still a lot of uncertainty out there. I mean, there are some parts of the economy that are improving but I think there’s still a lot of nervousness. And when you’re in the market that we’re in, which is fairly high end used cars, again, which almost always requires somebody signing up for a three to five year loan, I think there’s some nervousness out there. The two factors we always looking at are, what are new car sales, what’s the new car sales rate and as you can see, that number really hasn’t moved very much this year. It’s been in the $11 million range, down from a peak of $16 million to $17 million and unemployment is still around 10%. I think until we see those two numbers move, I don’t think it’s going to translate down to the higher end of used car sales. John Murphy – Banc of America/Merrill Lynch: Great. Thank you very much.

Your next question comes from Craig Kennison with Robert W. Baird. Craig Kennison – Robert W. Baird: Good morning. Thanks for taking my question. It’s been a while since you opened new stores. Maybe you could just give us a feel for how volumes typically evolve and what it takes to get to let’s say average volume, how many years?

Well, we haven’t changed anything about our estimates on how we think new stores will perform. What we have historically said is that store opens at about 70% of it’s what we were calling basic maturity and gets to basic maturity over five years. But then we saw modest sales growth over the five years. Again everything’s been kind of knocked out of whack over the last couple of years. But one thing we did say, when we announced our plan to grow is that we thought all the stores that we could open over the next two or three years would work at today’s sales level for us financially. So we haven’t changed our expectation about how we expect stores to perform over the long run. Clearly, we’re expecting stores to sell less stores out of the chute in today’s environment because all of our stores are selling less than they were two years ago. Craig Kennison – Robert W. Baird: Okay. Thank you. That’s helpful. And then I wanted to explore that buy rate further. Have you changed your appraisal process at all or is it simply the fact that offers are rising with the market and that’s driving a higher proportion of consumers to accept that offer?

We’ve not changed our appraisal process other than I think we get better at this every year because we have great training, we have really experienced buyers. You know, a year of not building stores stopped us from moving people around and I think so there’s some of that in there. I just think that in general we expect to improve our performance in all aspects of our business every year but the appreciation we’ve seen is unprecedented. So we’re really pretty good at tracking the actual wholesale values and then making sure that we pass that on to our customers. So a customer coming in today compared to just a year ago is going to get a significantly higher offer on the exact same car because the market has moved so much. So I think that has a lot to do with the buy rate increasing. Craig Kennison – Robert W. Baird: But given the margin benefit of a direct source car, is there actually an opportunity for you to say let’s increase that appraisal relative to where the market is and increase our buy rate percentage?

Right. It’s another thing that we always look at. But remember, if we were going to buy 100 cars and we wanted to buy another -- move our buy rate up another 2%, we don’t know which two to offer more on so you have to offer more across the whole pool. So if our buy rate is at 30%, we wanted to move it to 32% and we wanted to move our offers up by 100 bucks. It would cost us $100 across the 30, we were going to buy anyway to buy the two extra. But again, it’s just like testing pricing, we test -- we’re constantly looking at movement in appraisal volumes. We have various analytical models we run across markets and stores and we feel like we have a pretty good handle on it. Craig Kennison – Robert W. Baird: Thanks and congratulations.

Your next question comes from the line of Matt Fassler with Goldman Sachs. Matt Fassler – Goldman Sachs: Congrats and good morning. A couple of questions. First of all, it looks like your appraisal traffic is increasing to a greater degree than your traditional used car traffic, I guess I’d say. If you could talk about what you think is driving that particularly strong increase on the appraisal traffic front, if you think I’m reading those numbers correctly?

Yeah. I don’t have those numbers handy but our traffic was up. Then our appraisals per customer were up and then our buy rate was up so it’s a combination of those four things that delivered the higher volume and the higher self sufficiency. And although our appraisal traffic is up, we measure that as appraisals per customer, it’s not up that dramatically. So it’s kind of a waterfall. How many customers do we get and then of those customers how many do an appraisal. We got more customers, more of those customers, who did an appraisal and of the ones who did appraisal, we bought more of those and that delivered that number. It’s not like this big dramatic difference between appraisals per customer and customers. Matt Fassler – Goldman Sachs: Got it. My second question, your wholesale average selling price up over 20%, sort of decoupled to a large degree from the direction of what we saw in the used car market numbers, off a little bit from the increase you saw last quarter but the year on year increase in used car pricing overall had softened to a great degree. So what do you think is holding those average selling prices off to the degree we’re seeing?

You know, it’s hard to look at a lower priced car and used percentages because some of it was -- I think it was around 4700, around four grand last year and this might -- I thought it will make sense but $700 isn’t as big a move on four grand. When you say 20% on an average retail of 18 grand it’s a much bigger move. A few hundred bucks on a lower price point is, I think, a little easier to achieve with some changes in demand and change in wholesale appreciation. So it’s hard to look at that number in percentages and say it so outpaced retail because it’s only a few hundred bucks. Matt Fassler – Goldman Sachs: And is there any seasonality to that wholesale average selling price, in other words, you guys were close to $4,800 this past quarter. You were $4,200 last year, $3,900 the year before and it’s not clear that there’s a whole lot of seasonality. So if the wholesale market holds steady with these levels could that wholesale ASP also hold steady?

I don’t remember there being much seasonality. We haven’t really looked at it like that before. So I don’t -- like you said, I don’t remember there being much seasonality. I would say all the change is driven by the market and by wholesale appreciation externally. Matt Fassler – Goldman Sachs: Got it.

So I don’t think it’s seasonality. I think it’s all driven by the appreciation curves we’ve seen over the last couple of years. Matt Fassler – Goldman Sachs: And then my final question relates to Santander. Keith, if you could just remind us where on the P&L, we will see the benefits of the fact that your economics with Santander are about to improve?

You’ll see it in the third party finance fees. And so it will be in the other income on the financial statement. Matt Fassler – Goldman Sachs: And how material could that moving piece be?

Well, you’ll recall, we went from zero when we initially tested with this, basically they didn’t pay us anything and then we went up to a modest fee. Now, they’re going to be paying us at the same level as or similar level as our third party finance companies, which is in the 300-ish area. And so it really depends on how much penetration they do and seasonally that adjusts. So it’s not going to be real material but it’s certainly important.

But also depends what happens with subprime. And we’ve seen subprime a lot higher than we would have expected. And we don’t know what’s going to happen next quarter. That number can tend to offset some of what we would expect on the positive side. Matt Fassler – Goldman Sachs: Got it. Okay. Thanks so much.

Your next question comes from the line of Rod Lache with Deutsche Bank. Dan Gallatin – Deutsche Bank: Good morning. This is Dan Gallatin for Rod this morning. I’m going to continue the trend of questions on the appraisal business. It’s a little surprising to me that given the tight supply at auctions and the competition for good vehicles that, that only 40% of your sales would be coming from vehicles that you would appraise. Is there any change kind of in the mix, maybe in the mix of vehicles that are coming through the appraisal lanes, maybe they’re not as good quality or better demand at your own auctions that’s causing you to maybe sell more vehicles wholesale than put on your lot?

Yeah. One thing I haven’t mentioned in the appraisal volume numbers is there’s a huge miss in historical volumes that comes from the churn created by a higher SAR. If new cars were selling at 14, 15, 16 million annually, a lot of those customers who buy those new cars need to cycle out of the car that they’re driving and we’ve tended to play a strong role in helping them. And there’s just a huge chunk of customers missing from the marketplace, taking used cars out of it completely and just looking at new car volumes that just aren’t there right now. And I think until we see new cars rebound, at least part of the way back to where they were at their peak, we’re going to see our appraisal volumes be suppressed. Dan Gallatin – Deutsche Bank: Got it. That makes a lot of sense. Have you guys ever disclosed any type of magnitude of the gross margin per unit between a vehicle that comes from appraisal lane versus a vehicle that comes from another source?

Other than to say it’s several hundred dollars, no. Dan Gallatin – Deutsche Bank: Okay. Thanks. And then one last one, some of the new car public groups have talked about a real pickup in volumes in Florida. Have you guys seen any kind of differences in geography during the first quarter in terms of strength in different regions?

We historically don’t talk about regional differences and we’ll -- what we said before, particularly during the recession, was when our volumes drop, they dropped everywhere. And as our sales have come back, they’ve come back everywhere. Clearly, there is going to be a different magnitude in different markets but we’re not going to talk about regional differences. Dan Gallatin – Deutsche Bank: Okay. Thanks a lot for taking the questions.

Thank you.

Your next question comes from the line of Brian Nagle with Oppenheimer. Brian Nagle – Oppenheimer: First question, I want to shift gears here a bit and talk about, you comment -- Tom, you commented in the press release that you increased -- modestly you increased your advertising spend per vehicle sold. The question I have there, one, what was the magnitude of that increase and what form did it happen? And I know it’s a short amount of time, but how quick was the impact upon your sales? And then final question would be how much further do we have that we could push on that as we look at the sales line, still weak but getting better. Is that a big lever do you think as the consumer starts to come back to your stores?

Well, if you ask our marketing guys, it’s a huge lever. It’s the biggest lever we have. And we clearly said we would spend up some but we’re still going to continue to manage advertising on a dollars per car sold basis and then do our best by doing it market by market. Obviously, there is significantly different marketing costs in LA than there is in Louisville, for example. So it was -- I would say modest increase in the first quarter, but we’re going to continue to track it and we’ll push it when we think it’s appropriate. Brian Nagle – Oppenheimer: So was Q1 the first time in recent history that you actually started to push that more?

We pushed some of that in the fourth quarter. If you remember, we spent up a little around the Olympics and around the Super Bowl where we hadn’t done that in the past. So it’s kind of as we turn the corner on the calendar new year. We got a little more comfortable with pushing some advertising and we’ve kind of just continued that into the first quarter. Brian Nagle – Oppenheimer: Is the form, is it newspaper or does it also incorporate some of the Internet advertising we do?

When we talk about our advertising, it’s our advertising in total. And as we mentioned we’ve gone almost completely out of the newspaper, if you look at about a five year span, we’ve gone from as high as 35% or 40% of our total spending being newspaper down to pretty much zero. But we haven’t spent less on a dollars per car basis and we’ve talked about it before, but we shifted almost all that money into different various forms of Internet advertising. Whether we have all of our cars on cars.com, all of our cars are on autotrader.com, we test about any site that will list our cars. And then we do lot of search engine advertising, on Google, on Yahoo and anywhere else. So it’s pretty clear to us that that’s where the trend is and it’s pretty clear that that’s where we’ll be spending, continue to spend advertising dollars as well as a strong presence on TV. Brian Nagle – Oppenheimer: Okay. Thanks.

Your next question comes from the line of Scot Ciccarelli with RBC Capital Markets. Scot Ciccarelli – RBC Capital Markets: Hi, guys, how are you?

Hi, Scott. Scot Ciccarelli – RBC Capital Markets: Question for you. Tom, you’ve talked about, actually referenced today how volatile the business has been. You talked about that in the past, week-to-week, even day-to-day. How would you characterize trends? Have they started to become at least a little bit more consistent or are you still seeing the same levels of volatility you had seen maybe two, three quarters ago?

You know, when we -- right when the recession hit, our biggest lever of volatility was obviously just straight in customer traffic and sales but our business is pretty varied in terms of profitability. And so the volatility now is still impacting our total business but it’s coming from other places. And if you asked me where the biggest volatility was in the last year, it’s been in the credit market, which obviously impacts profitability we’ve seen. We’ve seen volatility in the wholesale market that has continued. We haven’t seen as much volatility, if we just look at our sales numbers over the last two or three quarters, it’s been a little bit more stable but that’s not the only driver of profitability for us. So in terms of volatility that impacts how we manage our business, I think it’s still extremely volatile. Scot Ciccarelli – RBC Capital Markets: Okay. And then without maybe being specific, but what we’ve been seeing here is two and three year trends continue to improve but still negative. Now, we’re about to kind of go against the Cash for Clunkers stimulus that we had. How are you guys thinking about or preparing the business for that kind of comparison?

When we look at Cash for Clunkers, we didn’t look at it as what impact did it have on us in the second quarter. We would have looked at it and said what impact did it have on us over the whole year. Because we always thought it was a pull forward and a bit of a spike. And when we looked at it by the end of the year, last year, honestly, we didn’t think it had very much impact on us over the course of the full year. So we don’t look at how are we going to compete with Cash for Clunkers in the second quarter. We look at what will our business look like over the course of the whole year and obviously our comparisons are tougher in the second half where we’re comparing against a plus eight, a plus eight and a plus 12. So it’s a little bit more of a difficult comparison but we don’t look at it on a quarterly basis like that. Scot Ciccarelli – RBC Capital Markets: Okay. And then -- thank you and then finally, you guys have laid out your store plans, obviously you’ve opened up what you said is going to be the full number for the year. If you continue to see improving consistency with a less volatility until -- at the P&L, any chance we could see an actual acceleration from what you’ve already outlined to us?

Yeah. There’s always that chance if we see something that would indicate that and when we decide that we wanted to accelerate, we would make sure to go ahead and tell everybody. At this time, we don’t have any plans to change the opening plan that we’ve laid out. Scot Ciccarelli – RBC Capital Markets: Got it. Thanks a lot, guys.

Thanks, Scot.

Your next question comes from the line of William Truelove with UBS. William Truelove – UBS: Hi. First, I want to say I like the new format of the conference calls. So thank you for that. In terms of reconditioning, you mentioned that’s the biggest opportunity. Could you talk a little bit about the magnitude differential and the reconditioning cost between using the flow model, some of your stores -- production stores versus what I’ll call it the standard model. What kind of differential in reconditioning cost is that?

Well, one thing to remember is more than 80% of the cars that we reconditioned, are reconditioned. What we call are traditional stores that we never could have achieved the savings if we didn’t achieve it across the board. So our reconditioning savings, I’m proud to report we’ve achieved across the board in both formats. We do believe that from our go-forward basis when we open up new stores that the flow model is a better way for us to manage those costs and a better way for us to find the efficiencies and then take advantage of them. But it doesn’t mean that we haven’t been able to find those efficiencies and take advantage of them in our traditional stores. As I mentioned, more than 80% of the cars that we retail are still reconditioned in our traditional format. And we’ve made great progress there and we’re very proud of that. William Truelove – UBS: So the new store openings over the next two years, would you anticipate that the mix between your traditional format versus the flow model would be something more like 75-25?

That’s really hard to say because I’m not exactly sure how the next couple years will lay out. But every store that we open that is a full reconditioning store will be in the flow format. But at our size right now with opening plan that we’ve laid out from a percentage basis, it’s probably not going to have much of an impact. William Truelove – UBS: Okay. One last question about the provision for loan losses, you mentioned -- I was wondering how much of a change has there been in terms of number of delinquencies or defaults versus how much of the benefit of the lower loss ratio is just from better wholesale pricing? Could you sort of give us a flavor for how that’s playing out?

I would say it’s, first the delinquencies and defaults were probably the larger portion. I couldn’t actually quantify that in a percentage basis. But even a year ago we were still seeing pretty strong recovery rates at around 50%. So while 56% is record levels, it’s not the driver of the overall adjustment. It’s just a contributor. William Truelove – UBS: Okay. Thank you very much. That’s all my questions.

Thank you.

Your next question comes from the line of Bill Armstrong with CL King & Associates. Bill Armstrong – CL King & Associates: Good morning. So your appraisal buy rate as a percentage of appraisal traffic was slightly over 30%. Could you tell us what it was a year ago and where did that buy rate peak?

I think we’re close to our -- you know, 30% is close to our peak. What we historically said is we buy a little more than one out of four. I don’t know what it was specifically a year ago but we’ve gotten down to less than 25%. And this is going back a couple of years. So it’s moved quite a bit from our low. But remember, there’s been a lot of appreciation and that appreciation has been going on now for about a year and-a-half and our buy rate is going to benefit from that. And remember, that’s only one of the factors of our increase in purchases, the other one obviously is traffic itself. So we’re pretty close to our all-time high. Bill Armstrong – CL King & Associates: Yeah. Is that something that you would want to target for higher rates since you do get more dollars per car on appraised cars?

Yeah. We would. But it’s a balance. For example, if we could get 20% more traffic and lower our buy rate by a few percentage points but net-net by more cars, we would take that in a second. There’s always a waterfall of customer flow and their appraisal traffic and their appraisal buy rate and the more customers we get the better. I would take a reduction in buy rate if we could get a huge increase in our customer flow but I think that’s somewhat out of our hands. Bill Armstrong – CL King & Associates: Right.

As far as your overall retail gross profit per vehicle, you site wholesale price appreciation, that clearly is raising your cost of vehicles acquired but is the offset in the fact that you can, number one, charge more at retail; number two, that it’s been -- it’s enabled you to increase your appraisal -- appraised cars purchased as a percentage of total cars purchased.

The biggest offset in wholesale appreciation is that wholesale appreciation exists for everybody, all of our competitors as well. And at the speed that we turn our inventory, if everybody’s price goes up $1000 and ours goes up a $1000, we’re still better priced than the competition. So I think the biggest offset to appreciation is the fact that it’s true for everyone. It does help with the buy rate because we’re continuing to raise our prices, but if you ask me my preference is to have lower prices. But we’re in an environment where appreciation is kind of overwhelmed that and our ASPs have gone way up. Bill Armstrong – CL King & Associates: Yeah. If wholesale prices start to trend back down as I’m sure they will eventually, would we then see the opposite impact? And all other things being equal see gross profit per vehicle trending back downward?

Well, I couldn’t give you -- I couldn’t tell you that exactly. But I could reference back to is my confidence and our confidence in our ability to manage through just about any wholesale environment. And if you go back to the fall of ‘08, in a three-month span, we had the worst depreciation and the largest dollar amount of depreciation we had ever seen, yet we were able to both improve our turns and improve our margins on a year-over-year basis. So I couldn’t tell you exactly what’s going to happen with margins but I feel really good about our ability to manage through any wholesale environment, up or down. Bill Armstrong – CL King & Associates: You have certainly done a good job of that. Okay. Thank you.

Thanks.

Your next question comes from the line of Matt Nemer with Wells Fargo Securities. Tricia Gill – Wells Fargo Securities: Good morning. This is actually [Tricia Gill] in for Matt. Just a couple of questions. On the last call, you talked about some of the differences from a cost perspective on restarting growth this year versus in years past. Now, that you sort of geared up and opened three additional stores, just wondering if you can comment on the efficiency of the business now versus historically as it relates to some of those pre-opening costs and other expenses you incurred?

You know, it’s a little different for these three stores because they were already built. But we expect to get back to -- I don’t know about the efficiency of pre-opening costs but we said we were going to open three to five stores next year. We’ll incur some of that cost at the tail end of this year. I couldn’t really quantify it but there is a number of pieces of pre-opening that -- advertising being one, relocation of experienced associates being another. Relocation has certainly not gotten any cheaper. We have a lot of negative equity issues you have to deal with if you’re moving a homeowner. So I don’t know that there’s a whole bunch of efficiency pickups in the way we open stores, particularly since advertising costs obviously will continue to go up and then relocation as I mentioned is another big driver of that. We don’t see that cost going down. So it’s more the number of openings that you have to cover in a year that we’re going to get the year-over-year impact on. We didn’t have any last year. We have three this year. We’ll have three to five next year many. We’ll have to build up those expenses accordingly. Tricia Gill – Wells Fargo Securities: Okay. That’s helpful. And then just wondering if you could discuss what you think will be the biggest impacts for some of the pending regulation in Congress, specifically the increase oversight under financial reform as well as the changes for ABS issuers?

I’d say probably one thing we’ve learned is that we’re on top of all of those issues but in terms of commenting on the impact on our business, until we actually have something that’s passed. It’s just pure speculation and I don’t think it’s -- I don’t think there’s much we can really say until we understand what we’re up against. Tricia Gill – Wells Fargo Securities: Okay. Thanks.

Again, if you would like to ask a question, press star then the number one on your telephone key pad. Your next question comes from the line of Scott Stember with Sidoti & Company. Scott Stember – Sidoti & Company: Good morning. Most of my questions have been answered already but did you disclose what the CAF penetration rates were on the sales during the quarter?

No. We didn’t. CAF was -- gross presentation was 36%, which is just modestly down slightly from a year ago but nothing much to talk about. And Katharine will be able to give you the net penetration after 30 day payoffs later.

Later, yeah. Scott Stember – Sidoti & Company: Great. Yeah. Most of my other questions were answered already. Thanks a lot. Bye.

Okay. Thank you.

There are no further questions at this time.

All right. I want to thank everybody for joining us today. As always, I want to express my thanks to all of our CarMax associates and their commitment for all they do every day and we’ll see you next quarter. Thanks.

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