CarMax, Inc. (KMX) Q2 2013 Earnings Call Transcript
Published at 2012-09-20 13:50:05
Katharine W. Kenny - Vice President of Investor Relations Thomas J. Folliard - Chief Executive Officer, President and Director Thomas W. Reedy - Chief Financial Officer and Executive Vice President
Scot Ciccarelli - RBC Capital Markets, LLC, Research Division John Murphy - BofA Merrill Lynch, Research Division Ravi Shanker - Morgan Stanley, Research Division Sharon Zackfia - William Blair & Company L.L.C., Research Division Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division Joshua Dolin - Wells Fargo Securities, LLC, Research Division James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division Matthew J. Fassler - Goldman Sachs Group Inc., Research Division Rod Lache - Deutsche Bank AG, Research Division Clint D. Fendley - Davenport & Company, LLC, Research Division William R. Armstrong - CL King & Associates, Inc., Research Division Efraim Levy - S&P Equity Research David Whiston - Morningstar Inc., Research Division
Good morning. My name is Whitney, and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax Second Quarter Earnings Call. [Operator Instructions] I will now turn the call over to Katharine Kenny. Please go ahead. Katharine W. Kenny: Thank you, and good morning. Thank you for joining our fiscal 2013 second quarter earnings conference call. On the call today with me, as usual, are Tom Folliard, our President and Chief Executive Officer; and Tom Reedy, our Executive Vice President and CFO. Before we begin, let me remind you that our statements today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see the company's annual report on Form 10-K for the fiscal year ended February 29, 2012, filed with the SEC. Before I turn the call over to Tom, let me also remind you that we are holding 2 of our regular analyst days in our home office here in Richmond on October 2 and October 30. If you're interested in attending, please let us know. Tom? Thomas J. Folliard: Thank you, Katharine, and good morning, everyone. Well we were pleased to report used unit comps for the second quarter of 5% compared to last year and total growth in used units of 8%. Traffic was somewhat lower than last year, but conversion increased due to the continuation of better credit offers and strong execution by our store sales teams. Total used vehicle gross profit grew with total sales by 8%. Used vehicle gross profit per unit of $2,172 remained virtually unchanged compared to last year's second quarter. Appraisal traffic was up again this quarter, but wholesale unit sales decreased by 2% due to a drop in the buy rate compared to last year. Remember, the buy rate for this quarter was approximately 28%. And as we've discussed before, the buy rate is correlated to changes in overall wholesale pricing, which affect the offers we can make to consumers, and we recently have seen some moderating wholesale vehicle valuations. Total wholesale gross profit fell as a result of lower unit sales and a slightly lower per-unit gross profit of $907. As far as CAF, CAF quarterly income grew by 19% -- Tom will talk more about that in a second -- to $76 million, largely as a result of a 14% increase in total managed receivables. I'll talk a bit about supply and mix of sales. We do believe the decrease in the supply of used vehicles since 2008 has adversely impacted our sales over the last couple of years. Assuming current SAAR trends continue, we expect to see an improving supply situation, particularly in 0- to 4-year-old cars where we have historically had higher share. We believe that as supply rebounds, it will positively impact our business over the next year or 2. For mix, during the quarter, sales of 5-year and older vehicles as a percentage of our total sales remained well above 25%. Year-over-year, sales of SUVs and trucks fell by about 2 points -- 2 percentage points this quarter and was offset by a similar increase in the percentage of compact and midsized vehicles sold. I'll now turn the call over to Tom Reedy to talk about financing. Tom? Thomas W. Reedy: Thanks, Tom. Good morning, everybody. You saw in the press release, CarMax Auto Finance continued to deliver strong results. CAF income grew $12 million or 19% compared to the second quarter fiscal 2012. This modestly outpaced the growth in our portfolio of average managed receivables, which increased 14% to more than $5.2 billion. Our interest margin after the provision for loan losses was up 16% due to that receivables growth plus the combination of the transition back to our pre-recession origination strategy, continued low funding costs and favorable loss performance. We also realized a year-over-year reduction in expenses arising from operating efficiencies. The growth in managed receivables was largely driven by strong origination volumes over the course of fiscal 2012 and into early fiscal 2013, which were lifted by the expansion in CAF penetration over that period, increased average selling prices and CarMax sales growth. For the quarter, net penetration was 37%, down modestly compared to the second quarter of FY '12, and net loans originated in the quarter increased 7% year-over-year. The allowance for loan losses grew by $13 million or 37% to $49.5 million. This increase reflects the shift in our portfolio back to a pre-recession origination strategy, as well as the growth in average managed receivables. Despite the change in credit risk, the allowance only increased 0.1% to 0.9% of average managed receivables, so our receivable loss performance remained very strong. Regarding access to financing for our customers, it remains at historically high levels, with more than 85% of applications continuing to receive at least 1 approval from us or one of our partners. Third-party subprime providers accounted for about 14% of sales in the second quarter. This is a continuation of the trend we have seen throughout the year. During the quarter, we also renewed the $800 million warehouse facility that expired in August. As you know, we maintain $1.6 billion of capacity, and the other $800 million facility expires in February of 2013. We continue to see a strong ABS market for bonds backed by auto receivables, and we feel good about the availability of funding in the current environment. Now I'll turn it back to Tom. Thomas J. Folliard: Thank you. I'll comment on SG&A and growth, and then we'll open it up for questions. We continued to ramp our infrastructure for growth during the second quarter. Given our store openings, our level of used unit comps and the speed of our ramp-up, the level of SG&A spending we've reported in the first half of this year is about where we expected to be. We remain pleased with the performance of our new stores. During the second quarter, we opened 3 new superstores, and we plan to open 5 more during the second half of fiscal '13, including 3 in our third quarter: one in Des Moines, Iowa, which is a new market for us; one in Oxnard, California, which is our 10th store in the Los Angeles market; and the first of 2 stores we will open this year in our new Denver market. Our Des Moines and Denver stores will be the next 2 of what we refer to as our next-generation model, the first of which we opened in February in Chattanooga. You will also note that in today's press release, we included 3 planned openings in existing markets for the second quarter of our next fiscal year in Houston, Sacramento and Frederick, Maryland. With that, I'd like to open it up for questions. Operator?
[Operator Instructions] Your first question is from the line of Scot Ciccarelli with RBC Capital Markets. Scot Ciccarelli - RBC Capital Markets, LLC, Research Division: A couple of quick items, hopefully. As your -- I guess, as the age mix has gotten a little bit older, Tom, are there certain vehicles that you're now retailing that maybe you would have wholesaled in the past? Thomas J. Folliard: It's a little bit of a tricky question because the answer is yes, but not because we've changed our quality standards. So we are retailing an older mix. We've been talking about that for the -- I think the last 3 quarters or so where our mix of 5- to 10-year-old cars has gone up pretty significantly. But we have not lowered our quality standards at all. However, there are some cars that we would have wholesaled maybe because they needed a little bit more time or a little extra reconditioning to get them up to our standard that we are now shift -- that we have shifted over the last year to retail, and we've done quite well with that segment. So it is pulling a little bit away from wholesale volumes. Scot Ciccarelli - RBC Capital Markets, LLC, Research Division: Got it. Any way to kind of size that impact? Thomas J. Folliard: No, not really. I mean, I probably could, but I'm not -- I don't have the numbers right here. Scot Ciccarelli - RBC Capital Markets, LLC, Research Division: Got it, okay. And then also, just in terms of the SG&A growth, I mean, I think you guys have done a good job prepping everybody for the rising SG&A as you kind of support the new store infrastructure. Can you give us an idea of how much of the SG&A growth might have been tied directly to the new store build and the pipeline that you're kind of building for future openings? Thomas J. Folliard: Well, first, let me talk about the -- SG&A sequentially from first to second quarter was pretty flat. And when you look at it year-over-year, there's a bigger increase in the second quarter compared to last year than there was in the first. But that was probably more due -- that was more due to kind of an unusually low SG&A for a couple of items last year second quarter. So sequentially, it was pretty flat. If you think about SG&A on a cost-per-store basis, it's roughly $1 million to $1.5 million or maybe a little more per new store opened, so that's part of that ramp-up. When you see us getting ready to open more stores in this year than we did last and more in last year than we did the year before, that ramp-up includes approximately about $1 million to $1.5 million per store.
Your next question is from the line of John Murphy with Bank of America. John Murphy - BofA Merrill Lynch, Research Division: Just one quick follow-up on this SG&A. I mean, Tom, as you look at the 10 stores that are opening this year and we look at them next year, I mean would you expect their SG&A sort of coverage or SG&A to gross to be sort of more normal? I mean, will they be fully ramped on an SG&A basis versus your gross profits next year? Thomas J. Folliard: No. We've always talked about our ramp life of a store to be around 5 years. So it's not exactly linear, but it certainly does not get to, let's say, the chain average after 1 year. So there's no question that a new store for us in terms of SG&A efficiency on a per unit sold is significantly disadvantaged to the average of the chain. So as we roll more and more of these new stores into it, we do get the SG&A negative impact of new stores, but obviously, we believe it's the right decision long term. And these stores make a terrific return over time, but they have, I'd say, a bit of a slow ramp-up. We've always said it takes about a year before they get to breakeven, covering all of their opening costs. But in terms of if you really look at SG&A on a per-unit basis, it takes longer than that. John Murphy - BofA Merrill Lynch, Research Division: Okay. That's very helpful. Then a second question about the used vehicle market, just more in general and what you're seeing. I mean, if you look at it, a new vehicle to a used vehicle pricing and assume that you get 0% financing on a new vehicle and you're paying 8% to 9% to finance a used vehicle, I mean, the equation seems like it's getting to a point where you may see some traditional used car buyers that would come into your stores tripping into buying a new vehicle. I’m just curious if you're seeing that and how much pressure you think that's putting on volumes for you in general. Thomas J. Folliard: Yes, we see it, and we've -- but we've always seen it. So we always see it on -- there's always some segment of car where that's true, particularly if manufacturers, at any given point in time, are running really aggressive financing programs. But if you look broadly at the average, the average new car is now over $30,000 and has been for most of the year, a number I'm a bit surprised by, to be honest with you. And the spread between the average new car sold and the average used car sold really hasn't diminished hardly at all because new cars continue to rise as well. But there is no question that there are some models, particularly with the financing piece, where if we have a very late model, whatever that car is, and you compare it to a new and you get 0.9% financing, some customers are making the decision to buy a new car. But that's always been true for us. All the way back to when we started the business in 1993, it's always been true on some segment of cars, depending what's going on with the manufacturers, how aggressive they're being with incentives, how aggressive they're being with financing and then, again, on a specific set of make and models. But broadly across the board, the environment really hasn't shifted very much. John Murphy - BofA Merrill Lynch, Research Division: Okay. And then just lastly, for the other Tom, on CAF. I mean you talked to going back to pre-recession origination strategies here, and I'm assuming you're just meaning buying deeper into subprime, which I think you guys have been talking about. But then you talked about third-party subprime providers increasing their penetration from 7% last year to 14% of originations this year, so it sounds like third-party subprime providers are actually really what's growing in the subprime portion of your business. I'm just trying to understand. I mean, is CAF getting crowded out there in the subprime? Or what's going on? Thomas W. Reedy: John, I wouldn't characterize CAF as doing any subprime. We historically approved a spectrum of credit that we got comfortable with throughout our history. During the recession, we dialed back on the lower end of that credit and, over the course of the last 2 years, have taken that back. So it's really -- CAF’s just getting back to the credit that it had historically originated. The subprime partners, over the last 1.5 years or so, have started taking up a bigger portion of sales, partly because we've seen lower credit coming through the door. And I think if you look industry-wide, we've seen some data from the credit bureaus that would indicate the percentage of auto sales getting financed today, a higher portion is subprime and a lower portion is superprime than a year ago or so. But the biggest part of it is that those partners of ours increased their appetite for approving CarMax customers and, more importantly, making them attractive offers. So the offers that our subprime partners are making today are more attractive to the customers than they were 1 year, 1.5 years ago. And we're getting more of the subprime customers taking them up on those offers. Thomas J. Folliard: Yes. And John, the change in the subprime for us, the 7% to 14% year-over-year, it's kind of in line with what we've seen over the last several quarters. And as Tom mentioned, the vast majority of that is not because we're seeing a dramatically different credit profile coming through the door but because our subprime lenders over time have gotten more and more comfortable with the CarMax origination channel. And as Tom said, they're giving both -- they're approving some more customers, but they're also giving better quality approvals, for example, lower down payment to existing customers that were already coming in. John Murphy - BofA Merrill Lynch, Research Division: So if we look at this increase from 7% to 14%, I mean, that accounts for the large majority of the same-store sales growth is really this increase in subprime loans going through. Thomas J. Folliard: It does in this quarter. And as we have always said, our goal at CarMax is to make sure that every customer that comes in the door has a good chance to buy a car because we provide them access to financing, and we're happy to be able to help these customers. We're happy that we have providers that have worked with us over the years and continue to get more comfortable, as I said, with the origination channel. So although these deals are not as profitable as a regular deal, we’re happy to do every one of them because we also believe that they're 100% incremental. Remember that a subprime customer at CarMax that gets approved through one of our partners, those partners don't even see that application until it's declined by all the other lenders. So at that moment, that customer, in our opinion, is about to leave the store, and they get this approval, and they're able to drive away with a high-quality car. And that's part of the reason why the -- a big reason why our partners have gotten more comfortable -- and they’ve told us this -- is because of the quality of car that we provide, and that just means that our customer is more likely to have their car operate longer, and they're more likely to pay longer. John Murphy - BofA Merrill Lynch, Research Division: And then just lastly, the follow-up, and I promise this is the last one. That really does mean that this backlog of trade-ins and churn that you'll see from the new vehicle SAAR picking up is still to come. It's still on the come and actually hasn't really benefited you just yet. Thomas J. Folliard: Oh, and I think that has absolutely nothing to do with the subprime. That's just straight math of the availability of 0- to 4-year-old used cars. I mean, the SAAR went from an average of 16.8 over 8 years down to as low as -- in 1 month, it was in the 9s. So as it continues to grow, you -- it's not an exact science. You can't just look out and say the supply is going to pick up by this much and therefore our sales will benefit because customers' behavior has changed. We're not sure about turn-in rates going forward, but we're absolutely convinced that as the SAAR continues to grow and the supply of 1-, 2-, 3- and 4-year-old used cars grows, that we will absolutely benefit. It's the segment that we've always over-performed with. When you look at our total share that we've reported over time of somewhere between 5.5% and 6%, if you broke that out by model years, we've historically done better in the 0 to 4 segment. That segment is not there in the volume it used to be, but it's certainly going to be coming back.
Your next question is from the line of Ravi Shanker with Morgan Stanley. Ravi Shanker - Morgan Stanley, Research Division: What levers do you have that you can pull on the wholesale business to improve results here and get that increase in the buy rates? I mean, do you have to adjust something, whether it be how much you're paying for these cars or how many cars you're getting on the wholesale side? Thomas J. Folliard: We've always talked about wholesale being a balance between wholesale and retail. And if -- there's no question we could increase our buy rate and we could increase our volume, but our margin would go down. If we raise all of our offers by $500, I'm 100% sure we would buy a whole bunch more cars, but our margin would go down across the board by $500. So it's always a balancing act for us. 28% for the quarter is on a -- I think it's over the top of 30% last year. Although it's only 2 percentage points, I think it's around 6.5% change. 28% is still pretty high. We're pretty happy with 28%. We were down at 23% in the recession, so we still feel pretty pleased about it. We've talked about wholesale over the last few quarters being abnormally high. We've had massive increases in wholesale. Our wholesale business has doubled over 2 years. Believe it or not, we're pretty happy that our wholesale business is maintaining these really high volumes that we’ve achieved over the last couple of years. So being down a couple of points and being able to maintain our margin and have a really -- what we consider a very strong buy rate, we're still -- we still feel pretty good about our wholesale business. Ravi Shanker - Morgan Stanley, Research Division: Understood. And are you seeing any impact at all from rental car companies aggressively de-fleeting over the summer in response to lower insurance business? Is that starting to make an impact on the market? Thomas J. Folliard: No, we haven't seen that at all. Ravi Shanker - Morgan Stanley, Research Division: Okay. And finally, now that you have this very aggressive ramp of opening new stores, are there any levers that you can pull on the SG&A side to get these stores ramped up faster, either just doing things in bulk on the administrative side or something that maybe reduces that 5-year ramp rate to maybe 3 or 4 years? Thomas J. Folliard: We're always trying to figure how to run our stores more efficiently, how to convert more customers that come through the door, how to lower our costs, how to lower our staffing. Those are the things that can shorten up the ramp rate. If sales pick up quicker, if we have a better environment, if the supply side of the business really drives extra comp sales, that would help with the ramp. But in general, even with that, we would still expect the store to grow out past its fifth year. And every year that a store grows, it continues to get better and better on an SG&A perspective. So there's not one button we could push that could take it from 5 down to 2 or 3. And it's really not 5. It's a lot longer than that because we've seen our stores grow past their fifth year. And even a 2% or 3% comp rate in the later years is a terrific leverage point on SG&A. And the last part is we are opening 10 stores this year and 10 to 15 next year, so we'll still see some ramp. But for the next 3 years, we've said 10 to 15 stores. So if we have a reasonably similar amount of openings year-over-year, you won't get that chunk of SG&A deleverage that we have by increasing the growth rate that -- like we have over the last 3 years. Ravi Shanker - Morgan Stanley, Research Division: Got it. So just to clarify, you expect a store to get up to like a normal corporate level run rate by year 5, but it may still grow above that. Is that the right way to think about it? Thomas J. Folliard: Yes. Well, historically, we've grown into the fifth year, and then we've seen growth past that. And we don't -- we just don't have that many stores that are more than 10 years old but -- and then we had the recession knockdown, so it's really difficult to judge. But our expectation is our stores can continue to grow, although slower. They grow pretty quick from 0 to 5, slower from 5 to 10 and even a little slower past 10. But our belief is that our stores will continue to have some modest growth past their 10th year of life.
Your next question is from the line of Sharon Zackfia with William Blair. Sharon Zackfia - William Blair & Company L.L.C., Research Division: I guess I'm just curious as to the improvement in sales trends is pretty nice this quarter. I guess you mentioned conversion. I mean, is there -- I mean, what do you think has really changed in the business this summer? And then if you could comment on new stores, how they're doing so far. I know it's early. But I think it'd be helpful to know if they're kind of adhering to the old plan that I think was the 10-year-ago white paper or if there's kind of a new paradigm. Thomas J. Folliard: Well, on the first question, I think our quarter -- our second quarter last year was negative 2 or negative 3. So we have seen an increase in conversion. There's no question that some of it is from the higher-quality offers of our subprime lenders, but I think our stores are doing a really nice job with the customer flow. And we continue to get benefits from training and development of our sales managers and our sales consultants, and we're very pleased with the results there. So all of our comp sales were from those 2 things. So we're pretty pleased with it for the quarter, as I said. In terms of the store and comparing it to the white paper, that's a difficult comparison because our profits on a per-car basis have changed so much since the white paper, and we have not updated it. So even if our stores were underperforming to model of sales, if they're performing at our current margin levels and you factor in the money we're making in CAF and wholesale, which wasn't in the original white paper, then from a financial standpoint, we could still deliver the returns that we expected at a lower sales level, which is one of the great things we've done, I believe, over the last couple of years of improving the CarMax business model is we can go into a lot of these markets with really high expectations, even if our sales expectations are lower. So when we've said that we're really pleased with our new store performance, we're going all the way back to when we restarted growth when we opened the 5 stores. And then -- I mean, I'm sorry, the 3 stores and then the 5 and then the 10 this year. When you put that group of stores together as a group, they're performing at or better than the rest of the chain. Sharon Zackfia - William Blair & Company L.L.C., Research Division: Okay. And then I mean, as you look at the longer term as carmax.com becomes more important as kind of the leader into the business, I mean, are the stores -- do you expect them to continue to get kind of modestly smaller over time? Or I mean, what does the store look like 5 years from now? Thomas J. Folliard: We've done -- I think we've actually done a pretty good job of like taking square footage out of our stores and being able to squeeze more out of them. But they're going to be sized based on the market that they're going into. Our next-generation store in Chattanooga was a little bigger. We put some more screens, some more technology. We had a little different customer experience in there. We had some customer segmentation in there. The square footage piece is not that expensive. And if it pays off, we would gladly do that going forward. But I'd say that it's an ever-evolving model for us, and we're just going to try to figure out what's the most efficient way to get the most sales out of each box, each square footage and each piece of acreage, which is actually the bigger chunk, because I think another thing we've been able to do over time is we'll go to a market and be able to build a CarMax on 5 acres, when before it might have -- we might have needed 15 if I'm going back 12 or 14 years ago. And so our ability to get it -- it’s just equally as important for us to be able to get the A site, the best site in the best retail row. And we feel very good about the progress we've made there.
Our next question is from the line of Simeon Gutman with Crédit Suisse.
It's Dan [ph] filling in for Simeon. I guess the first question, just wanted to kind of get your big picture thoughts on supply of late models. Obviously, mathematically, it looks like the population of nearly new maybe turning in the, say, like 1- to 2-year-old group. But if you look at the whole 1- to 6-year-old population, it doesn't seem like it's still there -- it's still not there yet. So I guess, separate from the math, which you already referenced, how does it feel in the marketplace? Is it any easier or about the same? Just kind of want to get your thinking there. Thomas J. Folliard: Because it -- because the math actually matters and it takes time for it to flow into the system, you said it right. We have not seen a big movement in the supply just yet. But obviously, with the SAAR being in the 14.5 range now, if it stays and continues to grow, which we hope it does, then we'll see benefit in the next couple of years, 1 year or 2 years and especially 3 years out. But we just have to wait for that supply to come back. But if you're saying what does it feel like right now, if you look at what we've done over the last year is respond to what consumers have wanted, which is older cars. And as I mentioned in the opening, our mix of 5- to 10-year-old cars is north of 25%, up close to 30%. And that number doubled from a year prior to that. So that's where more of the supply is and that's where our customers have shown us that they want to buy more cars. Our hope is that as the supply comes back -- we've gotten better at that older segment. We've gotten better at reconditioning it. Our customers are more comfortable buying that car from us. As I said earlier, we have not lowered our quality at all. And we're hopeful that as the supply comes back, we'll be able to take advantage of the increased supply again in a segment that we've historically outperformed in and, at the same time, continue to maintain some of the momentum we've built in some of the older stuff.
Right. And then hopefully just -- I guess kind of as a quick follow-up, just also want to get your thoughts on traffic. I think it was down last quarter. Obviously, in used cars, it's been, like you said, pretty good, which is generally good for you. So we were just hoping to see kind of like what's going on that changed that, maybe. Thomas J. Folliard: I mentioned traffic was slightly down. The used car market is down. We buy Polk data. We look at Polk data constantly. We only have it through June. But through June, 0- to 6-year-old car market was down 8%; 0- to 10-year-old market was down by 1%. So there's that piece. Secondly, I think the economy is still pretty sluggish. With unemployment where it is and with consumer confidence where it is, I still think that, that's impacting our traffic. It's impacting the customers' willingness to go out and sign up for as long as a 6-year loan. So I still think we have that -- the kind of the economy hanging over our customer traffic.
The next question is from the line of Craig Kennison with Robert W. Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Tom, you just mentioned the Polk data. Do you have that data for 7- to 10-year-old cars as well, just to clarify the impact on the older vehicles? Thomas J. Folliard: Well, I've just said 0 to 6 was down 8%. This is through June, so this is actually -- it's missing 2 months of our quarter. And 0 to 10 was down 1%. So as I said, there's more supply still in that 5 to 10, 6 to 10, whatever. But the market and kind of our wheelhouse where our kind our sweet spot is, is still down pretty big. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: That's fair. And then discussion on the supply has been helpful. But could you talk about the Manheim index and used car prices in general and how a decline in that metric will affect both your retail business and your wholesale business? I'm not sure that everyone gets that. Thomas J. Folliard: Well, the decline in -- at wholesale, the Manheim index is an indication of depreciation over the course of the year. And it's nothing new for us to have to deal with the depreciating car environment. It's actually -- we did it for a long, long time before we had the unusual circumstance after the recession where we dealt with an appreciating environment for a couple of years. So -- but the impact is, since the market is going down and we make market offers to our customers, it's going to impact generally our appraisal buy rate. I think that one of the reasons we saw our buy rate go down a couple of points this quarter, particularly compared to last year, is we've seen some moderating of wholesale pricing through the summer, some depreciation. So that's the biggest impact it has in our wholesale business. On our retail business, a customer who's trying to sell us their car, if they sell us their car and they're trying to buy another car, then they're more likely to buy a car from us. So you can make the correlation that if we're -- our buy rate is down a little bit, then there are a few less customers in there who would have bought a car from us because we didn't give them the offer that they expected. But again, 28% is a pretty high buy rate for us. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Yes, you bet. And then lastly, with Hurricane Isaac, did you lose any selling days in any stores due to the weather? Thomas J. Folliard: We did. But like we've always said, it doesn't really matter over the -- by the end of the quarter. So -- and it was mostly in kind of south Florida and along -- we only have 1 store in Louisiana, Baton Rouge.
The next question is from the line of Matt Nemer with Wells Fargo Securities. Joshua Dolin - Wells Fargo Securities, LLC, Research Division: It's Josh on for Matt. Can you give us an idea of what's going on with your web traffic and how that's trending? I know, last quarter, it was up kind of in the lower mid-teens. And maybe compare that to what's going on with decreased foot traffic. And any sense of why that's not converting over? Thomas J. Folliard: Traffic was up again. I don't have the exact number on the website, but it's never connected. Our web traffic over the last few years has always grown at a much higher rate than our comp sales. And that's just the way consumers are behaving. The other big shift in consumer behavior, which obviously we're not the only ones seeing this, is mobile devices and iPads and touchscreens. And that traffic is now, I think, 30% of our total volume. Just a year ago, it was 10% to 15%. So we saw it go from 5% to 10% and up to 30%. So I think some of the change in our traffic obviously is the ease at which people can now go search things on a mobile device. So -- but again, we're real happy with the website. We're really happy with our -- with where we are with mobile, but we got a long way to go. We don't have an app out yet. We'll be doing that soon, and we expect that mobile devices and iPads and things of that nature will continue to become a bigger and bigger chunk of our traffic. Joshua Dolin - Wells Fargo Securities, LLC, Research Division: All right. That's helpful. Continuing with online capabilities, can you give us an update of what's going on with EasyShop, where that's been expanded, how that program is working out for you? Thomas J. Folliard: Sure. It's -- we currently have EasyShop available in 8 of our stores in North Carolina and Tennessee. And they are -- as we said, the main goal is to give consumers more ability to do more of their -- to complete more of their shopping experience from home. So whether it's filling out a credit app, initiating a transfer, paying for that transfer with a credit card, making an appointment, filling out a portion of their paperwork, all that stuff is working great as far as the customer is being able to complete that -- those components of the transaction. I expect we'll be rolling out parts or all of EasyShop to all of our stores over the next, say, 12 to 24 months. But it's still a little bit early, and it's still something that we have to get a read on for each of those different components and make sure that we roll it out effectively. Joshua Dolin - Wells Fargo Securities, LLC, Research Division: Sure. Are you seeing increased penetration in people using EasyShop in those markets? Thomas J. Folliard: It's probably about flat over the last 6 months or so. I do need to correct. I said that the used -- the 1- to 6-year-old used car market was down 8 points. It was down 2, so I misspoke there. I apologize. And 0 to 10 was down 1. So both were down, but I misspoke on the magnitude of 0 to 6.
Your next question is from the line of James Albertine with Stifel, Nicolaus. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: Wanted to ask you on the competitive landscape. I'm not asking for market share. I know you don't provide it on a quarterly basis. But really wanted to get a sense for how you're thinking about the gap that, for the better part of the last 2 decades, you've created relative to the majority of your peers, right? We've had a market dislocation now. Late-model supplies have been disrupted obviously for the last -- the better part of the last 3 years. And in that time, technology across the board has been improving, and the industry, in some sense, has become more commoditized than it ever had been before. So as you're ramping growth within existing and new markets, what gives you comfort that you're maintaining, if not expanding, that gap you had, whether it's proprietary tools, technology, go-to-market strategies versus your peers across the board? Thomas J. Folliard: Well, first and foremost would be our volumes. Our average store sells about 330 cars a month. The average new car dealer sells about 50 used cars a month. That number -- that gap really has not moved at all over the last 10 years. So if I just look at our volumes compared to whoever the competitor is in whatever market we're in, that gap really has not moved. We operate 23 of the 25 top volume used car stores in the United States and 43 of the top 50. And we're the #1 volume used car seller in every market that we operate in. So I feel like from just the numbers, it looks like customers are still choosing us over the competition. That being said, there's no question that the availability of information to consumers has moved dramatically over the last, let's say, 5 years. The availability of third-party tools for our competition to have access to has changed dramatically over the last 5 years, providing customers access to finance, providing dealers access to inventory management models and things of that nature. The reason, I think, that our competitive edge remains as strong as ever is it's not like we haven't been evolving and improving over that same time period. I feel like we're much better today at running this business than we were 5 years ago. We're more efficient. Our data that we've talked about that we continue to build on year-over-year is cumulative, and we continue to benefit from that. Our ability to leverage our inventory is unparalleled. We have 40,000 to 50,000 cars online at any given point in time. We've gotten better and better at transferring and moving those cars for our customers. We have a website that is dedicated to managing all 113 stores in the chain. And from a store perspective, or our customers' perspective, any car is available to them. Our ability to build new stores and to move employees in without having to retrain them because our systems were all designed from scratch. We don't buy any of it off the shelf. It continues to, I believe, become a bigger and bigger competitive advantage over time, so -- and we have initiatives in place to improve in all of those areas. So although there are tools available and we've seen some movement and, as you said, there's been a shift with the supply, I really believe that as we get these new stores open and as the supply comes back, we are poised to really take advantage of the advancements that we've made and our bigger positioning around the U.S. with more stores. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: That's a great answer. And just as a quick follow-up to the subprime questions earlier, the increase in the third-party financing to 14% from 7%, just wanted to get your sense of where you see that targeted mix in a more normalized environment, be it this time next year if supply resurges or somewhere else down the road. Thomas J. Folliard: Yes, sure. First, that's -- it's kind of flattish to last quarter, so this is not really out of line with what we would have expected in terms of the percentage. We don't have a targeted percentage. As I said earlier, every one of these deals is a deal that we want to do. What I'd really like to see happen -- because we're not uncomfortable with the volume of deals that we're doing. What I’d really like to see happen over time, as I mentioned, with the supply coming back and with all the things I just talked about, that as our volumes come back, we’re able to make it up on the other side. To me, if it's 14% and it goes down to 5% because the rest of our business grows dramatically, that would be fine. But if they both grew, that would be fine with me, too. So we don't have a targeted percent for that segment of our business. We're very pleased to be able to make a competitive offer to that customer.
Your next question is from the line of Matthew Fassler with Goldman Sachs. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: I've got -- I want to start out with 2 questions, sort of marred in the details a bit on the other revenue line. The first relates to warranty penetration. Your warranty dollar number was up over $7 million, I guess pretty close to $0.03 a share year-on-year. It was the biggest increase you've had in quite a while. Any insight as to the drivers of better penetration? Was it pricing? Was it penetration of vehicles sold? Any other color would be great. Thomas W. Reedy: Yes. Matt, there's a number of things going on in ESP. But I think the disconnect you're seeing is the math doesn't pencil out with -- does an increase in attach rate on ESP plus the growth in sales equal the same amount of growth in ESP? Our contracts with our ESP partners are based on performance, and we simply received a feedback from one of them this quarter. It's something that is not unusual, but it doesn't happen every quarter. And because of how the performance of claims has been over the last year, one of our partners gave us a rebate essentially. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: Roughly had... Thomas J. Folliard: A portion [ph] of it is absolutely better penetration. We’ve had very strong ESP performance. Thomas W. Reedy: Yes. We're up with penetration a couple of points. Thomas J. Folliard: So it's the ESP penetration, the increased sales volume and the rebate. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: How material was the rebate? Thomas W. Reedy: It's a couple of million. Thomas J. Folliard: It's a couple million dollars of the $7 million. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: Got it. So we should look on an ongoing basis for a growth rate that more approximates the growth rate in used car revenue, presumably? Thomas J. Folliard: Correct. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: Okay. And then you've obviously gotten a couple of questions on subprime. I guess that line item continues to grow year-on-year. But you're, I guess, a quarter away from cycling the beginning of the pop in subprime penetration. So would it be your expectation that once you start the cycle, this increase that, that line item kind of levels out for you? And if you could just remind us of the economics of subprime for you on that third-party financing fee line item. Thomas W. Reedy: Matt, I think you're right. We have no indication that our partners have -- will have any different appetite than they currently are doing today, either positive or negative. I think we're in a comfortable spot. So as we start rolling over that change in behavior, I think we should see it be more consistent. And as far as the economics of subprime, as you know, we pay them a fee or we sell those loans at a discount. It's about $1,000. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: And just also by way of reminder, is there any difference in the intrinsic characteristics of the cars that get sold to subprime customers that would help compensate for that? Or do they look like more or less cars that would be sold through a higher-quality credit? Thomas W. Reedy: Overall, I don't think there's anything that differentiates them too much. We see some small variances, but nothing worth talking about. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: Got it. And then finally, there have been a couple of questions about the tools available in the environment and the increased impact of online on the business, broadly speaking. I guess, the one area I would like want bore down into a little bit is the theme of price transparency and think about that both from the sell side, that is your customers' perception of value, and also the buy side in terms of the deals that you're getting when you're buying cars through the wholesale business. As you look at your pricing versus the competition, and this is something, I guess, that we will have to try to measure on your own, are you seeing any material difference in the way you're coming to market from that perspective, assuming that your competition, which historically was not wired at all over the past few years, probably has -- whereas you were over the past few years, probably has developed somewhat greater capacity to at least be thoughtful of that? Thomas W. Reedy: Yes. I mean, that's a very difficult thing to figure out when everybody is negotiating everything except for us. So despite the fact that there's more availability of data for consumers, at the end of the day, when you end up at the average car dealer, they'll negotiate the price, they'll negotiate the financing, they'll negotiate the trade, they'll negotiate the warranty, none of which we do. So it's still very difficult to make price comparisons to prices that aren't really the price.
Your next question is from the line of Rod Lache with Deutsche Bank. Rod Lache - Deutsche Bank AG, Research Division: Just had a couple of follow-up questions. I was hoping you can maybe give us a sense of when do you think the supply of vehicles improved for you, just sort of adjusted for the weighted average age of the vehicles that you sell. Because I would think that the supply of 1- and 2-year-old vehicles will improve first, so that's one factor. And then also related to that, you commented that you're spending a little bit more time reconditioning as you're selling more "greater than 5 year old" vehicles. How does the reconditioning costs get affected as the mix kind of normalizes? Thomas J. Folliard: So on the first question, the -- again, it's not something we would project. I would just say over the next 1 to 4 years, we're going to see those volumes and the supply pick up. Because the thing we don't know is how significantly has consumer behavior changed in terms of how quickly they trade out of their car. I think a lot of that behavior is driven by how comfortable people feel about the economy going forward. So it’s just -- it's too big a variable to try to say, on a linear basis, we expect the supply to come back in a predictable manner to, I think, the level that you're asking. So I just feel really good about the supply coming back over the next few years, but it's, "Is it 1? Is it 2? Is it 3?" It's really hard to say. But again, just feel really good about the fact that it is picking up, and we do expect the supply to come back. And your second question was… Rod Lache - Deutsche Bank AG, Research Division: The second question is you said that -- I think you said that you're spending more money reconditioning now, that 25% to 30% of your sales are these more than 5 year olds? Thomas J. Folliard: Yes. So on a gross basis, an 8-year-old car is going to need more reconditioning dollars to bring it up to our quality standard than a 2-year-old car. That has always been true for us. It will always be true to us. So our volume of cars in 5- to 10-year-old has gone up, and therefore, our reconditioning dollars have gone up. But when we look at our savings, we have to mix-adjust those savings to understand if we're really getting them. So when we think of it that way, we're still getting the savings that we talked about earlier. It's just that from the starting point of where we measured those savings, we would obviously be starting from a lower point if it was a 1- or 2-year-old car with, say, 10,000 miles on it compared to an 8-year-old car with 90,000 miles on it. So again, we just have to mix-adjust our reconditioning when we're thinking about savings. But when you look at total gross reconditioning dollars, as our mix has shifted older, those dollars have gone up. Rod Lache - Deutsche Bank AG, Research Division: Right. But that’s going to normalize at some point. Thomas J. Folliard: By the way, that doesn’t impact our ability to sell that car or our profits. Rod Lache - Deutsche Bank AG, Research Division: Right. And my question is more along the lines of looking forward over the next, let's say, 2 years or so. Wouldn't the mix normalize a little bit more? And wouldn't that be another opportunity in terms of bringing the overall reconditioning dollars down? Thomas J. Folliard: Not really. Because again, all the reconditioning needs to be mix-adjusted on a year-by-year basis. So although the gross dollar would come down, as you said, that's not really a driver of our ability to sell the car or -- I mean, it is overall. But I'd just tell you, we expect to spend more dollars on an older car, and we always will expect that. Rod Lache - Deutsche Bank AG, Research Division: Okay. And then just lastly, obviously, there's some pace of growth that you need in order to avoid the SG&A deleveraging, and it depends on the pace of your store growth and wholesale trends and other things like that. I was hoping you might be able to update us on where you think that is roughly today. Thomas J. Folliard: Well, in general, in the past, we have always said mid- to high-single digit comps can start to get some leverage in a ramp-up growth mode. We're still in a ramp-up growth mode. We will be again next year. And look, we've only given guidance out for growth for the next 3 years. If we got to a stable growth number where we build roughly the same number of stores but the base of the existing stores increased, then you would see SG&A leverage come quicker. But all we've talked about is the next 3 years for now, so we'll see.
Your next question is from the line of Clint Fendley with Davenport. Clint D. Fendley - Davenport & Company, LLC, Research Division: I'm just wondering. Generally, given the seasonality in your business, generally, we have seen the SG&A flex down in the third quarter. I'm wondering, just should that change this up -- for the upcoming quarter given the plans to open 3 new stores in new markets in the quarter? Thomas J. Folliard: Yes. We're not going to give any guidance out on SG&A, Clint, sorry. Clint D. Fendley - Davenport & Company, LLC, Research Division: Okay, okay. I guess going back a little bit to the previous question around some of the SG&A per retail unit, and I know you've said mid- to high-single digits could potentially keep that number flat. How much would that change if you were to go, say, from 10 new stores per year possibly up to 15 or so? Or should we expect a big change in that? Thomas J. Folliard: Well, we've only given guidance for the next 3 years, and it's 10 to 15. But it all would depend on how many stores are in the base. And there's a lot of variables in there, how many stores are in the base, what are comp sales over the next several years, how big an impact do we get from the supply stuff we've talked about. Comps are a beautiful thing on SG&A. So I mean, at 15% comps, we could build as many stores as we wanted probably and still get leverage.
Your next question is from the line of Bill Armstrong with CL King & Associates. William R. Armstrong - CL King & Associates, Inc., Research Division: To what extent -- and I'm not sure if you can determine this, but to what extent might subprime growth be driven by the fact that you do have an older mix of vehicles in your inventory and in your sales mix and then that might be attracting -- just naturally attracting more -- a higher percentage of subprime customers. Thomas J. Folliard: I think that has very little to do with what's happened because the spike we saw at the last quarter -- I mean, I'm sorry, the spike we saw in the third quarter of last year, we were just really moving the inventory at that time. And as we said, it's not that our customer flow -- there's no -- it's true that our credit is down slightly. If you've just looked at our, let's say, our Beacon score through the door, but it's not down enough to explain the change. Most of the change is, as we've said, our providers getting more and more comfortable with the CarMax origination channel and making better quality offers to the customers that were already showing up at the store.
Your next question as from the line of Efraim Levy with S&P. Efraim Levy - S&P Equity Research: What do you see in terms of mix for trucks and SUV share? Thomas J. Folliard: We mentioned that our mix of trucks and SUV were down about 2 points year-over-year, and that was offset by an increase in compacts and subcompacts, up about 2 points. Efraim Levy - S&P Equity Research: And the impact on profitability on a shift like that, is that meaningful? Thomas J. Folliard: It's not. There's no impact at all.
Your next question as from the line of David Whiston with Morningstar. David Whiston - Morningstar Inc., Research Division: Just a long-term capital allocation question for you. I think clearly the best use of cash is to keep growing the store base. But it is there ever a profit environment and a macroeconomic environment where the board would be comfortable enough to do a share buyback to at least offset option issuance while also growing the store base? Thomas J. Folliard: As we've said before, we understand our position. We're pleased with all the improvements that we've made to the business model over the last few years, and we are generating cash at a faster rate than we can spend it building stores. And also, as we've said before, all options are on the table. So we continue to look at what we think the best use of capital is in the short term, taking into account what our long-term goals are. But we've always said we think the best use of capital is to continue to build stores, but in terms of a share buyback or dividends or any other use of -- any other traditional use of capital, we continue to evaluate each of them. And if we have something to report, we'll tell you. Thank you. And seeing no further questions, I want to thank all of you for joining us, and thanks for your support and interest. And of course, thanks to all of our CarMax associates, once again, for your dedication and hard work and all that you do every day. We'll talk to you again next quarter. Thank you.
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