Thomas Reedy - Chief Financial Officer and Senior Vice President Thomas Folliard - Chief Executive Officer, President and Director Katharine Kenny - Vice President of Investor Relations

Dan Galves - Deutsche Bank AG Clint Fendley - Davenport & Company, LLC Sam Yake - BGB Securities, Inc. Sharon Zackfia - William Blair & Company L.L.C. Craig Kennison - Robert W. Baird & Co. Incorporated Mark Mandel - ThinkEquity LLC William Armstrong - CL King & Associates, Inc. Simeon Gutman - Crédit Suisse AG Michael Kimlat - JP Morgan Chase & Co Patrick Duff Matt Nemer - Wells Fargo Securities, LLC Elizabeth Lane - BofA Merrill Lynch Ryan Brinkman - Goldman Sachs Group Inc. Brian Nagel - Oppenheimer & Co. Inc. Scot Ciccarelli - RBC Capital Markets, LLC

Good morning. My name is Shaira, and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax First Quarter Conference Call. [Operator Instructions] Ms. Katharine Kenny, you may begin your conference.

Good morning, and welcome to our fiscal 2012 first quarter earnings conference call. On the call with me today as usual are Tom Folliard, our President and Chief Executive Officer; Tom Reedy, our Senior Vice President and CFO; and Keith Browning, our Executive Vice President, Finance. Before we begin, let me remind you that our statements today regarding the company's future business prospects, plans 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, 2011, filed with the SEC. Tom?

Thank you, Katharine, and good morning, everyone. Thanks for joining us. We started off the new year with very strong results. Highlights included the following: used unit comps increased by 6% due to growth in traffic, partially offset by a modest decrease in conversion; total gross profit for CarMax increased by 15%; and gross profit per used unit increased to $2,224. Our wholesale results continued to be exceptionally strong. Unit sales grew by 32%, largely due to a significant increase in appraisal traffic. Our appraisal buy rate remains higher than historical averages at nearly 31%, and gross profit per unit was a little over $1,000. We are pleased with our used unit comp growth this quarter. We achieved these results despite economic and marketplace challenges, such as lower consumer confidence, high unemployment, elevated gas prices and escalating wholesale prices, which have driven up average selling prices of both new and used vehicles. CAF also had a great quarter, and I'll ask Tom Reedy to share some information about CAF and our related finance business. Tom?

Thanks, Tom. Good morning, everyone. CAF income this quarter increased $12 million or 21% compared to the first quarter of fiscal 2011. As expected, the CAF interest margin was up significantly over last year, reaching 7.2% of average managed receivables, primarily the result of older loans rolling off and newer higher margin loans becoming a greater portion of the portfolio. During the quarter, we continued to experience a favorable lending environment, and the interest margin on this quarter's originations remained wide. Our CAF portfolio grew 6%, with net loans originated up 33% compared with the first quarter of fiscal 2011. This increase reflected both the growth in our retail vehicle sales, as well as our decision to dial back arrangements with third-party providers and keep a greater portion of the loans that CAF historically approved but it elected not to retain after tightening lending standards in 2009. This action had no material effect on CarMax earnings for the first quarter, as the slight increase in CAF income was substantially offset by a loss of fees from third-party finance providers. In the quarter, CAF net loan penetration grew to about 34% compared to just over -- under 30% in both last year's first quarter and for fiscal 2011, overall. The provision for loan losses was similar to last year: a result of better-than-expected loss experienced in the quarter and the related adjustments to our forward-looking allowance for loan losses. Actual losses in the quarter were significantly less than expected, primarily due to fewer charge-offs. We believe this experience is consistent with others in our industry and reflects an improvement in our customer's ability or their willingness to pay. Recovery rates also continue to record levels due to the strength in wholesale prices. As mentioned in our press release, this favorability resulted in an increase of $0.03 per share in our earnings versus original expectations. Credit availability in the stores continued at record high levels, and the percentage of customers who actually utilize the in-house financing option was up modestly versus the previous year period. Subprime penetration was consistent with last year at about 8%. Tom?

Thank you. We were pleased to successfully open 2 stores this quarter in new markets for CarMax: Baton Rouge, Louisiana; and Lexington, Kentucky. And we're looking forward to 3 more openings throughout the rest of this fiscal year. We also reported on our planned openings in the first quarter of next year. Those will be in Bakersfield, California; Lancaster, Pennsylvania; and our third store in Nashville, Tennessee. Those will be the first 3 of the 8 to 10 stores that we plan to open in fiscal 2013. As you know at CarMax, we strive for continuous improvement in all aspects of the customer experience, which we know will also add to our competitive position over time. We focus on a number of potential areas, including improvements in our existing stores, new store formats, new potential markets and online enhancements. Our recent enhancements to carmax.com include the initiatives we have mentioned on previous calls: the successful introduction of our new mobile application and our test of EasyShop in 2 stores in North Carolina. As we move forward and gather more information, we'll keep you up-to-date on the progress of these initiatives. And with that, we'll be happy to take your questions.

[Operator Instructions] Your first question comes from the line of Brian Nagel with Oppenheimer. Brian Nagel - Oppenheimer & Co. Inc.: First I had, and we’ve discussed this in past quarters, Tom. But looking at the -- your results and the -- listening to your commentary with regard to traffic conversion. Given those trends -- you said the uptick in traffic in the quarter and then the slight moderation in conversion. Do you think we're at the point now where CarMax could start to maybe give up a little bit on that gross margin per used vehicles sold and actually have a positive impact upon sales? And if so, is that something maybe we can think about as we look at our models through the balance of this year?

Well as we've talked about Brian, that's something we're constantly evaluating. And remember that, that, that margin -- the reported margin is an average, so we've run in lots of stores at different margin levels. But some of what caused the lack of elasticity really continued in this year, probably bigger than we've ever seen. We haven't seen a supply-demand imbalance dynamic like we're seeing right now. Even back in the -- at the depth of the recession when we had that huge appreciation into the fourth quarter, that was kind of a onetime thing, and it was an adjustment from the drop. But what we've seen this year is just a continuation of increased prices. Our prices are up to -- our average retail's around $19,000, up from around $16,000 in the fall of '08. And we've always talked about that being a tail -- a little bit of a tailwind for margin. And if you look at it quarter-over-quarter, we were relatively -- we're pretty flat compared to last year's first quarter. So it's something we'll always evaluate, but we're still at a very different dynamic in terms of supply-demand imbalance. Brian Nagel - Oppenheimer & Co. Inc.: Okay. And then, maybe a similar type of question but in another way. Looking at the sales trend. So we did have a moderation as you highlighted as well. There are moderation from prior quarter levels. Were sales through the quarter -- did you see, where there specific events whether it be weather or maybe some other type of transitory issues within the quarter that hit your sales? Or was it -- the number we saw for the full quarter, was that more of a reflection of a steady trend throughout the period?

Yes, we don't talk about trends through the quarter. That's how the quarter ended up. Whenever we have weather or any type of event, we always feel like, different than in the grocery business or some other short cycle retail that we get those sales back eventually. We did have some hailstorms hit, which affected a few of our stores. They hit early enough in the quarter that we don't think it really mattered, plus it was only in a few stores. It did cause us some expense, more so than what we've had in the past. But in terms of an impact, we didn't see much.

Your next question comes from the line of Simeon Gutman with Crédit Suisse. Simeon Gutman - Crédit Suisse AG: It's Simeon. Tom, you mentioned conversion was a little lower at retail. And assuming that your execution was solid, maybe that's just a proxy for higher prices and just maybe demand slowing a bit. Should that be a signal to us that either the auction activity may slow in subsequent periods or that prices may just be too high and that should start to taper off a bit?

I wouldn't read too much into it. We always liked to -- when we talk about comps, we have in the past talked about some comes from traffic, some comes from conversion. When we look at it over time, we generally think we should get about half our comps from traffic and about half our comps from conversion. We have no reason to believe that, that's different going forward. We had a very slight decline. If I look at this quarter's conversion, it's still higher than what we ran a few years ago. I think your point on some uncertainty in the marketplace at higher retail. I said it -- I already said it. Our retail is at the highest they've ever been. And I do think there's still quite a bit of uncertainty out there in the economy, and I think people are still a little bit skittish about pulling the trigger and signing up for a loan. And despite all that, we still had a 6% comp. And you do have to look at the comp comparison back to the depth of the recession. The first quarter is a much tougher comparison than the fourth. And the last piece is that our -- you look -- you saw our wholesale number up 30%. Our appraisal traffic is up a whole bunch, particularly on the wholesale side. And we measure conversion as a percentage of our total traffic. So this disproportionate increase in traffic that is essentially appraisal only is going to have an impact on that math. Simeon Gutman - Crédit Suisse AG: Right. And I guess the appraisal traffic combined with the strength of pricing, as well as gross profit at auction -- I mean, we saw -- I think Manheim shut a few auctions down. It almost felt like things could have started to slow, yet your numbers don't suggest that at all.

Well the difference with us in the -- and the bigger -- we're now, I think, the third largest auction chain in the country behind Manheim and ADESA. Manheim and ADESA rely heavily on other people bringing cars there. They rely heavily on newer, later model cars. Our auction is very exclusive. It's only cars that don't meet our retail standard. It's only cars that we buy through the appraisal lane with the exception of a few cars that we -- that don't meet our standards that we buy offsite. And it's a steady stream. We have the same attendance. So our dynamic is very, very different. So I just think it's difficult to compare us to the other auction chains than -- and they're moving -- you see more movement online for them. And when there's movement online, that oftentimes means that the car never is actually brought to the auction, whereas every one of our cars is bought on-site. Even if we found a way to sell them online, we still have to put them somewhere. Simeon Gutman - Crédit Suisse AG: And I saw that the buy rate was high. I mean, is that the same number, the ratio of number of dealers at the auctions relative to cars?

No, the buy rate is of how many cars we appraise, how many of those do we buy. And that number was a little north of 30%, which is at or right around a historical high for us. So that's another indicator when we look at our margins to see if we think we're being fair, is how many of those car we're buying. And we're buying, pretty much, 1 out of every 3 cars we appraise. So that's an indication that we're making solid offers. Our average price in wholesale is up to $5,400. That's the highest it's ever been. So it's just on the -- and our margins are only up $100 over the year. So that means we've raised our offers to the consumer by almost $1,000 in 12 months for a similar product. Simeon Gutman - Crédit Suisse AG: Yes, and then I guess connected to that, are you seeing the ratio of...

Yes, the ratio is very, very strong. It's not the strongest we've ever seen. But I think if you look at these 2 first quarters stacked on top of each other, last first quarter, volume was up 52%. This quarter, up 32%. So I mean, our volume has just gone up dramatically. But our attendance ratios are still very strong. I think they're in the 1:3 to 1:4 range. So that means if we run 140 cars, we get 100 dealers bidding on those cars at any given auction. I mean that ratio is unprecedented in the industry. Simeon Gutman - Crédit Suisse AG: And my last question on inventories. Can you just talk about how you feel about the positioning right now? Pricing obviously is at all-time high, but you have new production that will presumably ramp up and resume, call it, in 2 months from now. That coincides with what is normally a used price depreciation time of the market. So how do you -- how does that play a role in your forecasting and building inventories right now?

We're pretty comfortable with where we are right now in inventory. And historical depreciation usually happens later in the second quarter towards -- into the fall. We'll see what happens this year. I feel really confident in our ability to manage our inventories around whatever dynamic we happen to see in the marketplace. The increase that you see in our inventory year-over-year, part of that is that our sales are up. Part of that is that our average retails are up, since we report in dollars. And part of it is that we weren’t in -- we're in a better position inventory-wise this year than we were in last year. Last year, we felt we were under inventory. This year, we felt more comfortable building. Even now, we feel fine about our inventory position going forward. I don't think we'll see a huge drop off in depreciation. At least, we haven't seen it yet. And even when we do, we feel well positioned to manage through it.

Your next question is from the line with Sharon Zackfia with William Blair. Sharon Zackfia - William Blair & Company L.L.C.: I had a longer term, I guess, more strategic question. My understanding is that you and the board are kind of discussing the right rate of growth for CarMax longer term, whether as a percentage rate of unit expansion or a fixed number of stores per year. And there are obviously positives and negatives from a P&L perspective for both of those. I was just curious if you could give us your perspective on, as we look beyond fiscal '13, kind of what the company looks like from a longer-term growth paradigm?

Well I think the biggest thing to note is the fact that we have so much growth out in front of us. We're still only in half of U.S. markets. We still believe we're not fully stored in many of the markets that we're in. I think the best part about our story is the growth that we have in front of us. In terms of the pace of growth, we've announced 8 to 10 next year. We have not updated that. We obviously think about it all the time. We had talked about having to build back up our infrastructure that we cut during the recession in both real estate, construction and management bench. We're making great progress in all of those areas. We feel really good about our ability to grow, the announced growth that we've already said. So the 5 this year, the 8 to 10 next year, but we just really haven't updated anything past that. But I will tell you that, that is still the single thing that we're most excited about as our prospects for growth going forward. Sharon Zackfia - William Blair & Company L.L.C.: Okay, and then maybe just a really quick question for Tom, the other Tom. I think the initial finance income guidance was 205 to 235 for this year. And it looks like even if you exclude the $0.03 this quarter, you'd be well on track to exceed that, and I'm just curious if you're going to update that guidance or if we just assume that it's not valid anymore.

Sharon, I think we're not -- you can assume that we're not going to update the guidance. But I think we are giving you indications of what is disconnected from what -- where we were initially. For instance, the penetration of CAF is higher than where we assumed at beginning of the year and the losses seem to be coming in a lot strong -- less strong from a loss perspective than we originally anticipated. So I think we're giving you some tools to make your own decisions. And that, along with the origination metrics that we'll give in the Q every quarter, give you an idea what's going on as far as new originations.

Your next question comes from the line of Matt Nemer with Wells Fargo. Matt Nemer - Wells Fargo Securities, LLC: So just a couple of questions. Just to come back to the -- an earlier question about the conversion. I just want to make sure I'm clear. You're including wholesale or appraisal traffic in that number. So mathematically, it's down in part because of the wholesale business has been so strong?

Yes, yes, and that's the same way we have always talked about conversion. We've always included total store traffic of which some is people just coming to get their car appraised. So that's the way we've always reported it. Matt Nemer - Wells Fargo Securities, LLC: Okay, I just wanted to make sure. And then the second question is you had a great expense performance. And I'm wondering how much of that is due to the wholesale performance. In other words, is the flow-through a lot higher in the wholesale business because the incremental cost is lower there than it is in the used vehicle business or the retail business?

Some of it is just the change in average retail as well. We hold ourselves accountable to dollars per used unit sold. And on that measure, we slightly delevered in the quarter. So whenever we talk about percentages, we don't want to get credit when our average retails go up or when wholesale volumes go up. And we look at it on a total revenue basis nor do we want to get penalized on the way down if we're managing the business well on a per unit basis. But we feel really good about where we are on SG&A. We talked about it coming back. We talked about components of it coming back, like commissions. We did make an adjustment to our commissions this year for sales consultants, which had a little bit of an impact in the quarter. We are spending more money on advertising on a per unit basis. We spent more money this quarter than we did the year prior. So I mean, those are the kinds of things that we said that you could expect to come back as we came out of the recession. Matt Nemer - Wells Fargo Securities, LLC: I guess asking it another way. If you have an incremental dollar of profit in used retail and an incremental dollar profit in wholesale, is the flow-through of that dollar a lot different to the operating income line?

Yes. Matt Nemer - Wells Fargo Securities, LLC: Okay. And then just lastly on CAF, so you had -- you've had sort of a, I guess, a onetime benefit in the first quarter for the last 2 years. Is there -- how should we think about a normal loss provision in Q3 on a -- sorry, in Q1 on a seasonal basis. I mean is it typically similar to Q -- to the last 9 months of the year? Or maybe you can give us a general dollar amount just so that on a go-forward basis, we can model it properly?

I don't think we can give you guidance on what a normal world is, especially given the fact that we've had to adjust our loss expectations a couple of times in the last year and a half. What I can say is the driver of our better loss results came about half, maybe a little bit less than half from actual experience during the quarter, fewer losses booked during the quarter. The remainder was adjustments to our loss reserves that are really driven by that loss experience that we've seen.

I don't think it was a first quarter phenomenon. I think it's the consumer behavior has been changing over time. It happened to be the last 2 first quarters it had an impact that we needed to tell you about. Matt Nemer - Wells Fargo Securities, LLC: Right. No, no, I just want to make sure. We shouldn't be modeling that as essentially zero losses in Q1 on a regular basis. It should be closer to, call it, $5 million or $10 million.

We need to assess what we believe the appropriate loss reserve is every quarter. And we're going to adjust to make sure that we are there. And it just happened to be that the first quarter were the times that we saw this, the improvement.

But I mean, what it tells you, Matt, is that the beginning of -- before the first quarter started last year, we told you what we thought. And then at the end of the first quarter, it was something different. And that was the same thing this year. It's not like we went into this year thinking, “Well at the end of this first quarter, we'll have an adjustment.” At the beginning of this year, we took all of our experience. We gave you the guidance that we gave you. And at the end of the first quarter, our experience was different than we had anticipated just 3 months ago. Matt Nemer - Wells Fargo Securities, LLC: Right, okay. And then I guess just lastly, the decision to retain more loans as opposed to flow those to third parties, is there anything specific around that? Are you feeling about the environment or out of the woods? Or just the profitability on the loans is so good, you'd like to keep some for yourself?

I think you just answered your question there. I mean, we backed off of that business, not because we thought it was overly risky. We've seen those loans perform in probably the worst environment possible. And we've always said that we've wanted to be in this business to the extent the markets will let us. So I think it's a combination of those factors. It's a combination of the view on profitability versus passing it off to the partner beyond our ability to fund it and the overall environment. And I think we're comfortable stepping back in to some extent at this point.

Your next question comes from the line of Ryan Brinkman with Goldman Sachs. Ryan Brinkman - Goldman Sachs Group Inc.: Clearly, the wholesale volumes were very strong on strong comps. How are you thinking about the drivers of these lines going forward? I know you mentioned that appraisal traffic was the biggest driver. But are you doing anything different to drive appraisal traffic, such as changes to advertising? And did your buy rate also improve as customers were surprised how much their vehicles were worth?

In terms of advertising, it's always been a relatively steady diet of we buy cars is what we call it. We buy cars advertising. So no, we have not had a big change in the way we market this piece of our business. I think it's a dynamic that we couldn't have anticipated with consumer behavior around, particularly around that segment of car, the $3,000 to $5,000 car that we seem to be getting a lot of people bringing those in to sell them to us. And as you can see, the volumes are very disproportionate to retail and have been now for well over a year. But I mean, we could speculate on why that is. But in terms of our behavior being any different, it's not. Ryan Brinkman - Goldman Sachs Group Inc.: Okay and...

And I already talked about our ratios and buy rate. Ryan Brinkman - Goldman Sachs Group Inc.: Did you say what your self-sufficiency rate was for the quarter?

It was in the low 40s. So it was up year-over-year, a little -- up 3 or 4 points year-over-year and flattish to the first quarter -- to the fourth quarter. Ryan Brinkman - Goldman Sachs Group Inc.: Okay, great. And then just last question, you mentioned in the prepared remarks, particularly you mentioned experimentation, even thought experimentation may be with new store formats. Is there anything you can elaborate further on this? For example, could it possibly entail a smaller store format that could increase the ultimate store potential that had previously been estimated at roughly 300 or so?

Well we've always said 200 to 300, but built into that 200 to 300, we contemplated a successful smaller store format. And right now, we're evaluating and working on it, but we don't have any plans in the announced growth phase that we've already announced. But we'll get back to -- we had built Charlottesville several years ago. And we talked about that being our small store format. And we do -- we will get back to building some small stores and testing them, but we don't have anything planned for this year. The other format store we talked about, I think I've talked in the past about evaluating our existing box and can we do something different and more creative, and we're also working on that. And we don't have anything to report on it yet, but I think we'll get a -- really a newer format store is more of an evolution from our existing stores. And I think we'll have something up and running by maybe the end of this year.

Your next question comes from the line of Clint Fendley with Davenport. Clint Fendley - Davenport & Company, LLC: In the last few weeks, we've seen some of the buyer-to-seller direct competitors like Auto Trader providing online guarantees and really tightening their alliances with new dealerships. Have you seen or do you expect that to impact your ability to procure your inventory here while supplies remain tight?

Well we're well aware of that program. We're paying very, very close attention to it. It’s very difficult for us to see impact with the numbers that we've been delivering. A 32% increase in wholesale, that's all bought through the appraisal lane on top of a 50% increase in wholesale of the year prior. Really record buy rates for us. Big increases in our traffic in that area. Right now, it's just difficult to see an impact, but it's something that we're very aware of, we're paying very close attention to, and we'll see. We'll see if it develops over time. Clint Fendley - Davenport & Company, LLC: I know you guys have done a lot of work around just upfront online offerings to your customers. I mean, does this new offering by Auto Trader accelerate possibly some of your beta testing that you're doing here?

We really haven't done much with upfront. I'm not sure what you mean on that. Upfront? Clint Fendley - Davenport & Company, LLC: I know you've done some work to where the customer can come in and try to arrange transfers and things like that online, possibly without coming into the store. And I wondered if maybe you would think about doing the same on the pricing for a possible appraisal?

Yes, I mean, we're going to continue to look at what our other options are. But it's very, very difficult to put an accurate offer on a car without seeing it on a description from the general consumer population. I think it's actually impossible to do consistently well. Our research on the things that have been going on with Auto Traders, most of those offers are being redone once the consumer actually gets to the store. And that's kind of against the way we think we should do business. So it doesn't mean we won't try to test some -- giving the customers much more information or as much information as possible so they can make an informed decision. But in terms of coming up with a hard offer with somebody else entering their data in a system, I just -- I'm not very confident in that.

Your next question comes from the line of Patrick Duff with Gilder.

I'm good. Actually, all my questions answered. I couldn't get off, but I'll just say congratulations.

Thanks, Pat.

Thanks, Pat.

Your next question comes from the line of Rod Lache with Deutsche Bank. Dan Galves - Deutsche Bank AG: This is Dan Galves in for Rod this morning. I wanted to follow up on the wholesale business a bit. Auction volumes were down about 8% in 2010. CarMax wholesale volumes were up 33%. So obviously, you're taking a lot of share from the auctions. A few questions on that. Do the auctions see you guys as a competitor, and is there anything -- any kind of competitive action that they could take to hurt you? And on the other hand, I mean -- or do you have any testing in place or potential -- is there any potential for you guys to start consigning other people's vehicles in your own auctions?

On the first part, I don't think that mathematically, if you went and did the -- if somehow it could be done, I don't think we're actually taking share. We're looking at 2 completely different customer bases. Dealers -- I mean, I'm sorry, auctions are recruiting dealers and banks and off-lease companies to bring cars to the auction and railcar companies and things like that. We're only buying cars from consumers. Every car bought individually for a consumer. We've never once brought a car in from a dealer to run in our auction. So I don't think the auction's really view us as a competitor, nor do we view them as a competitor for that product. We obviously compete for dealers to come and bid on cars, but not for the car themselves. And in terms of consigning other cars, right now we have no plans to do that. I don't think that's something we would do. We have an exceptionally high sell-through rate. We sell about 98% of everything we run. The reason we can do that is because we own all those cars, and we can make the decision to sell them. I think it would add a level of complexity. And it would be a whole different business for us to go out and recruit other people to bring cars to their auction. And I think it would lessen the quality of auction that we currently run. We focus on customer service in that business just like we do on the retail side. And I think we run a great auction, and I think that just adds the potential to mess it up a little for us, slow down our turns. And ultimately, I don't think it's the right decision. Dan Galves - Deutsche Bank AG: Okay, that makes sense. And is there any point in the wholesale business where your kind of infrastructure, your capacity to continue to increase the volumes gets constrained and you have to invest in infrastructure facilities?

We've already actually done that in a couple of locations. We've built a separate facility up at our Laurel store. We built an offsite and separate facility in Sacramento. Every time we do that, we're obviously looking at the return on investment required to justify the construction. But remember that we only run auctions in about half our stores. So we have lots of extra capacity to continue to grow the business. But it's absolutely a factor in our decisioning whenever we go to a new market, we have to factor in the acreage required to run an auction. So when we go to new markets like we're going to go to this year like Bakersfield, California, we have to think about what are we going to do with the auction cars? Now a lot of times, we'll open a store, and we'll just run those auction cars at a different store. And we plan from the beginning not to run an auction at that store. So we'll open Escondido, California, in the next couple of months. And that's a store that will not have its own auction, but we plan for that in advance. Dan Galves - Deutsche Bank AG: Okay, and just a couple of questions on CAF. Can you talk a little bit about how customer rates have trended since the last securitization? Also it looks to me like the cost of funding on some of the pools that are in the managed receivables, the cost of funding has gone up a bit in your disclosures. Is that true, and will that be a drag on future -- on the interest margin in future quarters?

I'm not sure where you're seeing the cost of funding going. I think all our recent deals have been pretty strong relative to history. Dan Galves - Deutsche Bank AG: I guess I meant that if you take kind of one -- a particular loan pool from the kind of the February disclosures to the May disclosures, it looked like the cost of funding increased. I thought maybe because of the increases in the benchmark rate. Is that not the case?

It may have. But remember, we also hedge our benchmark risk as we're originating loans. So what we're really trying to do is lock in that spread between APR and cost of funds at the time of origination, as we originate. Dan Galves - Deutsche Bank AG: Okay, that's very helpful. And how has the customer rate been trending? I think your last deal was like 8.6%. Are the loans in the warehouse facilities, have they had higher customer rates than that or lower?

I think if you look at, like the last deal, we've been trending pretty consistently with that, except this quarter, as we talked about, we introduced more of the lower credit tiers back into the portfolio. And we'll be doing that on a go-forward basis, so you could expect to see that APR, that average APR going up because the mix is shifting.

Your next question is from the line of Scot Ciccarelli with RBC Capital Markets. Scot Ciccarelli - RBC Capital Markets, LLC: Tom, I know historically you kind of viewed $1,000 as an upper barrier on gross profit dollars for your wholesale units. And obviously we've reached that this quarter. What do you think the right way to think about that going forward is? And I understand we're in a fairly extreme environment as you already mentioned in terms of supply-demand. But just in terms of the gross profit dollars per wholesale vehicle, what do you think the right way for the investment group to think about it is?

Well I wish I knew, Scot. We've talked about $1,000 being the top end. And we went over here, and we talked about all the dynamics that led to that. But we don't think that, that's a sustainable number for us. So we've never really given specific ranges around our expectations because what we've always said is, we're going to move our offers to make sure that we're buying a reasonable number of cars. And at this rate, of about 1 out of 3, it's hard to say we're not making good offers. If we saw that number go down, we would raise our offers and, therefore, lower our margins. A lot of these customers who are selling us their car are also buying a car from us. So that's -- the most valuable piece of the transaction is not the wholesale piece, but it's that customer that also buys a car from us. So I mean, we're going to move along with the marketplace, but we're also going to take advantage of the market whenever we can. And that's kind of the situation we're in right now. And I do think it's a supply-demand imbalance that we've never seen before. And I think when the SAAR goes back up a whole bunch, maybe we'll see some movement in our appraisals, maybe we'll see some movement in our buy rates. And I think that we will almost certainly see a movement in our sales. So it's a pretty unique situation. I don't have a great answer for you. I think these margins are very high, and we don't expect them to be sustained. Scot Ciccarelli - RBC Capital Markets, LLC: All right. And then obviously average ASPs on used units were up pretty sharply. Can you talk maybe a little more specifically or give a little more color in terms of maybe the different segments you saw? Obviously, I would assume that compact cars were up sharply, but did we see a lot of depreciation in like SUVs and trucks and, let's call it, less fuel-efficient vehicles?

For the quarter, Scot, remember at the end of last -- at the end of the fourth quarter, we talked about that movement being fairly steady from the beginning of the year prior to the end of the fourth quarter where we saw a big shift in sport utilities, away from sport utilities and V8s and towards compacts. We didn't see much movement from the fourth quarter to the first quarter. First you're going to see a difference because, again, it started last year. But from just specifically talking about the first quarter, we didn't see much movement from the fourth quarter. Scot Ciccarelli - RBC Capital Markets, LLC: All right, that's helpful. And then...

The appreciation to change our average retail was largely across the board. Clearly, compacts have moved more in the last 12 months, but if we’re talking specifically about the first quarter, it wasn't that much different from the fourth quarter. Scot Ciccarelli - RBC Capital Markets, LLC: Okay. Got it. And then last, looking for some clarification. I apologize if I misunderstood this, but it sounds like you are financing more of your own vehicles. Did you also say you dropped a couple of third-party vendors in that process? Was that this quarter? Or is that -- you mean over time?

I think what we said and what is the case is, we've reduced the number of loans that we're passing forward to those third-party vendors and retaining a greater portion of them ourselves.

But we didn't...

We didn't -- we're not…

We still have the same lender relationships. Scot Ciccarelli - RBC Capital Markets, LLC: All right. So it's just the number that you're kind of showing to the third-party buyers?

The program that we were referring to is one where CarMax Auto Finance was selling loans to the third-party guys that represented business CarMax used to do before tightening credit in 2009. And what we're doing is getting back into that business to a greater extent. We've, over time, continued to participate at a much reduced level from where we were historically to keep on top of the pool performance and experience with that line of business. And now we're in a position where we feel comfortable taking back a greater portion of it. But it doesn't change the mix of lenders that we have in the stores.

Next question comes from the line of John Murphy with Bank of America Merrill Lynch. Elizabeth Lane - BofA Merrill Lynch: This is actually Liz Lane on for John Murphy this morning. On inventory, I don't know if you give this metric, but I was just wondering if you have inventory for the quarter on a days supply basis? And how that number compares to last year and -- or last quarter and a year ago?

We report our dollars, and our dollars were up year-over-year. And I mentioned the reasons for that earlier. Some was our sales increase, some is an average higher retail and some is just -- we intentionally had more inventory this quarter than we did last year's first quarter. Elizabeth Lane - BofA Merrill Lynch: So in terms of actual vehicles, you had more than last year?

Yes. Elizabeth Lane - BofA Merrill Lynch: Okay. And what was the average age or at least directionally of used vehicles sold at retail in the quarter? Is that trending toward older vehicles due to a lack of available late model inventory at all, or is it pretty consistent?

Yes, I don't really -- I don't have that number handy. I don't think it's trended as much as people might think, but it's -- we expect it to move to older because there's less supply in the market. I mean, the SAAR went from $17 million down to $10 million, and has yet to recover. So all those cars are missing from the last 3 or 4 years. I'm seeing if I can get you a little more specific information, but we don't have that handy. Elizabeth Lane - BofA Merrill Lynch: But generally, that doesn't really impact your gross profit per vehicle at all?

No, and it certainly hasn't so far. Elizabeth Lane - BofA Merrill Lynch: Right, okay. And just one other one about store growth. I know you're not changing your guidance at all, but are there potentially enough trained store managers to raise that store openings scheduled toward the higher end of the announced range or above? And what are some other constraints, if not management?

Well right now we said 5 this year, which is 3 more, and then 8 to 10 next year. And we will be well positioned to provide all the resources required to get those stores opened from a capital perspective and from a management perspective. And whatever growth plan we decide to do going forward, we'll make sure we're well positioned to do that. And we have plenty of time to get prepared between now and then.

Your next question comes from the line of Craig Kennison with Robert W. Baird. Craig Kennison - Robert W. Baird & Co. Incorporated: On the wholesale business, you're clearly selling more cars or buying more cars at wholesale. And that rate of growth is faster than retail. So does that imply that customers are choosing not -- I guess your trade-in customers are choosing to not necessarily trade in then buy a new car, but rather just liquidate their car and raise cash? Or conversely, is that customer trading in a car at your store and then going to another dealership? How should we interpret that data?

That's very difficult for us to figure out as well. I can tell you that with the comp sales number that we had, clearly some of them are buying a car from us. The SAAR was terrible in May. So it's just really hard to figure out what's going on. I think the first point of some people just selling an extra car to raise some cash, that's definitely a possibility. There really isn't great data out there for us to figure it out. The growth rate in our wholesale business has been disproportionate to retail for quite some time. We did have a dynamic where we had a decline in this business for a couple of years prerecession. We're actually still not doing as many appraisals today as we were prerecession, believe it or not, even though we've seen these big increases. So it’d just be sheer speculation to try to figure out what those customers are doing. Remember our offer to the consumer is we make a cash offer on any car, whether or not they're buying a car from us. And at the point of appraisal, we're not really asking them because we want to make sure that, that offer is the best offer that we can give to that customer for that car at that time. And their particular situation of whether or not they’re buying a car is really irrelevant to what their car’s worth. So we can really, could only speculate. But I think your first point is one that we think might have some merit, which is that people are just selling extra cars here and there. Craig Kennison - Robert W. Baird & Co. Incorporated: Makes sense. Secondly, the subprime number, your mix of subprime was flat, I think at 8%. Is that a number you expect to remain flat, or is there room for that number to expand?

I mean that really just depends on the mix of customers coming through the doors. The appetite of our non-prime lenders and also how aggressive our subprime lenders are willing to be. So it's hard for us to predict to give any kind of color as to where that should be.

One thing we could tell you though is the current, our current subprime offering, if we got more of those customers in, we would sell more of those cars. It's not like they're saying, hey, don't give us any more of this business. We're selling what the mix that's coming through the door. Craig Kennison - Robert W. Baird & Co. Incorporated: Got it, that's helpful. And finally, I know you have some pilot stores on the smaller store format. What are the economics of that store format, and are they vastly different than what you see in other stores?

We don't -- we only have the one store, which is in Charlottesville. We have not yet gone into what we would consider a small -- we do have some smaller -- we have stores that sell 1,000 cars a month and stores that sell 200 cars a month. So we have experience all over the board. But our return hurdle is the same for any investment.

Your next question comes from the line of Himanshu Patel with JPMorgan. Michael Kimlat - JP Morgan Chase & Co: This is Michael Kimlat in for Himanshu. I just have one quick question from my side. I wanted to get a sense on your provision for loan losses and charge-offs. I want to know whether there is any seasonality here due to any tax reimbursements or anything like that. When I look at the prior year, the first quarter, your provisions were pretty low. But then they were significantly higher in the subsequent quarters. So can you please just provide any color on this?

I guess the best way to address that is that our expectation at the beginning of the year included adjustment for seasonality. So the experience that we're seeing is above and beyond any normal seasonality for cash refunds or anything else. As we said, we really believe that customers are finding money and either by -- because they have a greater desire to pay us or a greater ability to pay us. We have seen fewer loans go bad and, therefore, having to recover fewer cars. Michael Kimlat - JP Morgan Chase & Co: And how should we think about this going forward?

I think if -- we've got the loss provision which we believe is the best representation of our loss expectation going forward. We look at every, every vintage of origination in our pool. And we look at the experience of those originations. And we come to a conclusion on what our loss expectation should be based on the composition of portfolio. We do that every quarter, and we make our best judgment. As far as where it goes going forward, I can only tell you we'll adjust as we see different experience.

Just like we did over the last 3 years, both adjust down and adjust back up. And you do the best you can with the information that you have. But we're not going to try to speculate on where the market's going.

Your next question comes from the line of Sam Yake with BGB Securities. Sam Yake - BGB Securities, Inc.: I was just wondering, I had seen -- you had put out -- you had made a big deal about how you took a survey of your customers. And I think 95% of the customers would recommend CarMax to a friend. And I think it was 75% of people who didn't buy a car would still recommend them. I'm wondering, do you have any update on those figures? To me, they are very critical.

I don't, Sam. That was, I think, a couple of years ago when we referenced that number. I know that we look at our total satisfaction from our consumer base on a net promoter basis, if you're familiar with that measure. And our numbers have been very, very strong and, in fact, up from the recession to now. I don't have the specifics of the 2 things that you mentioned, but in terms of the way we measure customer satisfaction, our scores have been very strong. Sam Yake - BGB Securities, Inc.: Would it be fair to say that customer satisfaction's better than it's ever been at CarMax?

Yes. Sam Yake - BGB Securities, Inc.: Okay. And one other quick question. You're building a little cash on the balance sheet. Your results are very strong. I'm wondering, do you have any plans to possibly do a stock buyback, at least enough to offset the dilution from stock options?

That's -- we've looked at that. We've looked at every possible use of cash, and we still believe the best use of our cash is to grow the business and grow stores and invest in our future. And right now, that's our plan. Having a little extra cash on the balance sheet is a good experience compared to 2 or 3 years ago. And 3 years ago, nobody was asking us what we were going to do with the cash that we didn't have. So right now, that's our plan. We'll constantly evaluate our cash position and what we think the best use of that capital is in the long-term best interest of our shareholders.

Your next question comes from the line of Bill Armstrong with CL King & Associates. William Armstrong - CL King & Associates, Inc.: On CAF, your provision for loan losses was actually credit. If we back out the adjustment you made to the allowance, what would the provision have been?

Are you asking if you annualized what the losses in the quarter where, what would be as a percent of...:p id="35957357" name="William Armstrong" /> No, not annualize, but you had a credit of $1 million. You obviously had an adjustment to the allowance that is an offset to the balance sheet. So in other words, how much was the adjustment? In other words, what was the loan loss provision on a normalized basis?

The adjustment was about $10 million or $0.03 after tax. William Armstrong - CL King & Associates, Inc.: Okay. On customer traffic, is there any way for you to figure out what the impact might have been from either shortages coming out of Japan or the slowdown in the month of May in the SAAR?

You mean specifically attribute changes in customer traffic to those things? I'd say no. William Armstrong - CL King & Associates, Inc.: All right. Any way to have any sense for what the impact might have been?

No, not that we know. William Armstrong - CL King & Associates, Inc.: And then finally, just kind of bigger picture, what's your outlook, in terms of looking at the industry in the supply-demand imbalance. Do you see that persisting for some time to come, or what dynamics do you see coming towards us that may change that?

I don't think we would have predicted it to stay where -- as long as it has into this -- into really into this year, in this quarter. I don't think the SAAR -- this is just my opinion. I don't think the SAAR can stay where it is. I think it's a combination of population growth and the scrappage rate would just indicate that the SAAR will go back up. I don't know that it will go back to 17. I think somewhere between here and there is probably more realistic, and I couldn't give you any idea what the timeframe is. I'd say that we wouldn't have expected to see what we've seen in the first part of this year. I would’ve expected the SAAR to recover more. But again, I'm just speculating. William Armstrong - CL King & Associates, Inc.: Right, do you see a return to full production from the Japanese manufacturers as perhaps helping to improve the SAAR? And then obviously, the impact of that will be more trade-ins coming into the system?

I think that's a definite possibility. And as we've always said, the SAAR up -- the SAAR going up in any meaningful way not only impacts our appraisal traffic, but as always in the past, been an indication of consumer demand and consumer demand for the type of stuff that we sell. So we've always said, we think the SAAR is low. We want it to go up. We think if it goes up, it's beneficial to our business in many different ways.

Your next question is from the line of Mark Mandel with ThinkEquity. Mark Mandel - ThinkEquity LLC: First, a follow-up on CAF. In the past, you've guided us with respect to the net interest margin expecting that to trend lower towards but not all the way down to that historical range of 4.5% to 5%. Since then, it's obviously gone in the other direction. I was just wondering if you could give us a little guidance, a little more color as to how you expect that metric to progress.

We're obviously not good at it.

And I think what we've guided in the past was that we don't know what the right number is in the new world that it could very well be higher than it had been in the past. But we're going to have to wait and see how that trends out. So as Tom said, we're not very good at predicting it. But I think we continue to believe, as we said last quarter, that it's not unreasonable to expect that, that might compress due to competition, rising interest rates, whatever. It just hasn't happened yet. Mark Mandel - ThinkEquity LLC: Got it. And then as far as the franchise car dealers are stepping up their used vehicle efforts. Has that affected your business in any way to date? And if not, do you expect any changes in your dynamics going forward?

It's really -- it's another one of those things that's very difficult for us to gauge. One of the bigger measures we have is what is our share gain look like, and we only report that on an annual basis. And our share gain was strong last year and even stronger the year before. We had a great comp sales quarter, despite all the challenges that we've already talked about. And it's not the first time that all the new car dealers have said they're going to focus on used cars. That's been a pretty consistent theme for several years. And I know things are a little bit different right now. But I also think some of what's going on right now is a little shorter term, particularly around the Japanese situation with Japanese manufacturers and the shortage of supply there. You see a lot of those dealers out in the marketplace in a much more aggressive way than they have been in the past. So eventually, I think that will subside, but it's really difficult to look at our results and say that we've been impacted. Mark Mandel - ThinkEquity LLC: And then another question, on the reconditioning effort, any additional efficiency gains that you can call out?

No, not -- at the end of the year, we said we got 250 sustainable. And we thought, originally, when we talked this, it was around 300. I've said numerous times, I think the last 50 will be a lot more difficult than the first 200. But nothing to update since the end of the quarter. Mark Mandel - ThinkEquity LLC: And then service department sales slipped a little bit year-over-year. Anything to note on that front?

No, nothing of note.

[Operator Instructions] Your next question is a follow-up from Simeon Gutman with Crédit Suisse. Simeon Gutman - Crédit Suisse AG: Related to the new car dealer, kind of related to a little bit the last question. Realizing your strategic process is probably a long-range one, and you're taking into account everyone in the market, not just one channel. But anything tactically that you do different in the near term, whether it's sourcing, advertising or even pricing that you can do in response to the new car dealers, which they seem to be taking more share than they had been in the past? So I'm just curious what any near-term reactions may be.

Yes, I mean, again, we're very pleased with the quarter that we delivered. And from a strategic standpoint, we continue to grow pretty much all aspects of our business in a very challenging environment. So in the short-term, we're not really -- it's not like we're out there trying to change some core part of our consumer offer because we think it's starting to lose its luster. So no, nothing really in the short term, other than try to do a great job with every customer when they walk in the door and give them an experience that they can't get anywhere else. Simeon Gutman - Crédit Suisse AG: But I mean, you've done a great job, but it doesn't bother you that maybe that extra customer could have been coming in your door, but now the new car dealer has an extra vehicle on the lot that caught their attention. And you can't have all the share, but at least, the rate that you were growing at seems maybe a little faster before the increased focus. So whether there's something on the advertising side or social media side that you can even become more ingrained in the consumer's mind?

Well our spending was up on advertising as we talked about. I think some of the initiatives that we've already discussed are also ways to continue to drive more consumer traffic. Some of the stuff I talked about last quarter around what we call EasyShopping, giving the consumer more ability to do things from home. I mean, those are all efforts to make sure that we remain the leader in the industry. And we'll continue to invest in those things. But I mean, it's just when you say short term, short term, everybody has a different definition of short term. We’re not changing what we're doing in the next couple of months. We feel like things are going pretty well. But we are investing in our future.

And there are no further questions. I'll turn it back over to our presenters.

All right. Thank you, everyone. Thanks for joining us. Thanks once again to all of our associates. Thanks for all you do every day. And we'll see you next quarter.

This concludes our teleconference. You may now disconnect.