Katharine Kenny - Head, Investor Relations Tom Folliard - President and Chief Executive Officer Tom Reedy - Executive Vice President and Chief Financial Officer

Matthew Fassler - Goldman Sachs Brian Nagel - Oppenheimer Sharon Zackfia - William Blair Craig Kennison - Baird John Murphy - Bank of America James Albertine - Stifel Lynn Walter - Wells Fargo Irina Hodakovsky - KeyBanc Michael Montani - Evercore Bill Armstrong - CL King & Associates Nick Zangler - Stephens David Whiston - Morningstar Paresh Jain - Morgan Stanley Robert Iannarone - RBC Markets

Good morning. My name is Jineesha and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 FY 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Katharine Kenny, you may begin your conference.

Thank you and thank you for joining our earnings conference call. On the call with me today as usual are Tom Folliard, our President and Chief Executive Officer and Tom Reedy, our Executive Vice President and CFO. Let me remind you that our statements today regarding the company’s future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see the company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2015 filed with the SEC. Before I turn the call over to Tom, I would like to mention that our next regularly scheduled Richmond Home Office Analyst Day will take place on January 20. If you are interested in attending, please let us know. And as always, I hope you will remember to ask only one question and a follow-up before getting back in queue. Thank you. Tom?

Thank you, Katharine. Good morning, everyone and thanks for joining us. As you saw, we had a challenging third quarter due primarily to slightly negative used unit comps. Here are some of the key highlights for the quarter. Used unit comps decreased by 0.8%, while total used units grew by 3.2%. Gross profit per unit of $2,160 was in line with gross profit per unit of $2,172 in the third quarter of last year. And total wholesale units grew 3.4%, about the same rate as total retail units. Gross profit per wholesale unit grew by $22 to $949 per car sold. CAF income also grew 3% to approximately $92 million. I will turn it over to Tom Reedy to talk about finance. Tom?

Thanks, Tom. Good morning, everybody. As Tom mentioned, CAF income grew by 3% compared to third quarter fiscal ‘15 and average managed receivables grew by 15% to $9.3 billion. The weighted average contract rate charged to customers was 7.3%, up somewhat from last year’s third quarter of 7.0%. Our total interest margin declined to 6.0% of average managed receivables from 6.4% in the third quarter of last year and 6.2% last quarter. We saw some tick up in charge-offs during the quarter, which resulted in a modest increase in the loss provision. However, at $91 million, our ending allowance for loan losses was 0.97% of managed receivables consistent with last year’s third quarter at 0.98%. CAF net penetration was 42.9% compared with 41.8% in last year’s third quarter. The increase reflects a mix shift towards higher credit applications in stores. The percent of CAF penetration attributable to our sub-prime test was unchanged at about 0.5%. Net loan dollars originated in the quarter rose 6% year-over-year to $1.2 billion due to combination of CarMax unit sales growth and higher penetration. As you saw in the press release, Tier 3 financing as a percent of sales is 150 basis points lower than in the third quarter of fiscal 2015. This decrease was primarily due to the mix shift I mentioned with regard to CAF penetration. In Q3, we experienced a year-over-year decline in the number of credit applications across the lower end of credit, but moderate growth at the higher end. During the third quarter, we repurchased 7.7 million shares for about $446 million. We ended the quarter at the low end of our target range for leverage, which is booked debt to capital after backing out the notes in receivables associated with non-recourse securitizations of 35% to 45%. Going forward, we expect to continue using share repurchase as a means of managing capital structure and returning value to shareholders. Tom?

Thank you. As a percentage of our sales mix this quarter, 0 to 4-year old cars increased to approximately 81% compared to 75% in the third quarter of last year and 79% in the second quarter. SUVs and trucks, as a percentage of sales, were 23% down from 25% in last year’s third quarter, but up slightly from 22% in the second quarter. Our lower used unit comps were primarily a result of modestly lower traffic in our stores partially offset by better conversion. Total web traffic increased by 7% compared to the same period last year. We believe our cost may have been impacted by several factors of note this quarter. First, we have seen a decrease in the supply of 5-year-old to 10-year-old cars as you would expect. Second, we have seen very aggressive promotions and lease offerings from new vehicles that appear to be pressuring sales of 0 and 1-year-old cars. Wholesale prices of SUVs and trucks have increased. So, some don’t represent a good value for our customers. And as Tom mentioned, Tier 3 was down about 150 basis points due to lower credit applications. Now despite these factors, we still sold over 154,000 cars during the quarter, which is the most ever in the third quarter for the company and our average store during the quarter sold 340 cars. SG&A for the third quarter increased about 7% to $338 million. Contributing to this growth was the 10% increase in our store base since the beginning of the third quarter of last year partially offset by a decrease of $6.5 million in share-based compensation expense. In addition, our advertising expense grew by about $9 million year-over-year reflecting the timing of expenses related to our new ad campaign. During the third quarter, we opened 2 stores in existing markets, our sixth store in Houston and our second store in Minneapolis. We also relocated our Rockville, Maryland store to its new larger location in Gaithersburg. And after the end of the quarter, we entered the Boston market with the opening of 2 stores in Danvers and Norwood. And with that, operator, we will open it up for questions.

[Operator Instructions] Your first question comes from the line of Matthew Fassler of Goldman Sachs.

Thanks a lot and good morning. My first question relates to SUVs, I know you guys were down about 200 basis points year-on-year. Do you have a sense for what the used market is doing for SUV mix, in general? In other words, do you think used market sales of – do you think the mix of SUVs to the market is down, is it flat, is it up or are you differing in the way you are indexing in SUVs versus your broader competition?

I am not sure which is the broader competition, Matt, but we were up a point compared to the second quarter and we still sold a lot of trucks and SUVs in the quarter, 23% of our total sales. But as I mentioned, our prices were pretty high during the quarter. And as you know, we buy a lot of cars at the auction and our buyers are trying to make sure we always deliver a great value to our customers. So, there are times during the quarter and we just didn’t think it was worth overpaying at the expense of giving a great value to the consumer. I think this is probably short-lived. Obviously, it’s been driven by low gas prices. We have seen bigger increases in new car sales as it relates to SUVs and trucks compared to the used car market increases. But ultimately, these cars will all come back into the market at some point.

And then my follow-up for you briefly, the advertising dollar shift into Q3, was that out of Q2 or out of Q4?

Really, we just wanted to point out that we launched a new campaign during the quarter and that this just – it wouldn’t be a typical increase for us in terms of our quarter-over-quarter expense given that the sales level that we had. So, we weren’t really trying to say came from one place to the other just this is not what you would expect typically from us on a year-over-year basis. We did create and launch a new campaign during the quarter that started in September.

And how do you guys feel that campaign wise as you measure, I know given where the sales force you measure the return on that ad campaign, I know it’s been early to judge, but your own evaluation?

Yes, it’s very early to judge. Particularly when you have a new broadcast campaign, it’s mostly around brand building and not necessarily for short-term sales gain. You guys know we are not promotional. We don’t have sales. So, most of our campaigns are long-term brand building.

Got it. Thank you.

Thank you, Matt.

Your next question comes from the line of Brian Nagel of Oppenheimer.

Hi. Good morning and Thanks for taking my question. So first I think my first question is just basically follow-up to what Matt asked, but Tom thanks for laying out some of the extra color there with regard to sales in the quarter, but how do we think about if you take those individually, how do we think about the I guess the trajectory from here, I mean it seems the comments you made some of those factors will begin to abate here, but maybe a little more color on that as to how we should think about these factors going into the balance of this fiscal year and into 2016?

One, it’s very difficult to attribute a number of points to each of the factors. They are just all things that we noted during the quarter. We also had our toughest comparison of the year, which I didn’t mention. And our 2-year stack comp in the third quarter was actually higher than it was in the second quarter. But I think each of these things had a little bit of an impact on our ability to deliver during the quarter. Most of them I think are short-lived, it’s very difficult to predict trends and when things are going to change and supply, but I think we have done a really nice job over the last several years of being able to adjust and adapt to changing trends in the used car marketplace. I think we will do the same here. I just thought those were things we should have pointed out during the quarter. A lot of the supply stuff is going to take care of itself over time and we are going to take advantage of the things that present themselves to us.

Got it. And then so maybe a follow-up to that, I think there is a lot of comments or commentary out there about new competitive – new competitors coming into your marketplace, have you seen anything new with respect to this, your stores that may compete more directly with some of this new competition?

I mean, we – it’s an ever-changing marketplace. A lot of the stuff we have seen is around additional capabilities, which we are working really hard to continue to increase for our customers. And as I mentioned remember, our average store sold 340 cars a month during the quarter. If you look at industry data, the average new car dealer sells about 50 cars a month. So it’s really hard to say that we are losing ground and a lot of that stuff that you read about for – from new competition are very small players in very limited markets. So it’s not likely that we are seeing an impact across the nation for our 153 stores when a lot of the press you see is around very small players in limited markets.

Got it. Thanks and best of luck with balance of the year.

Thanks Brian Nagel.

Your next question comes from the line of Sharon Zackfia of William Blair.

Hi good morning. My first question I think is pretty easy. I did not see any kind of quantification of the ad spend kind of the launch and how much of that might have been incremental, Tom do you have any color you can provide on that?

We did not quantify it, but of the $9 million difference year-over-year, the majority of it was around the new launch.

Okay. And then obviously you have seen the cycles in terms of kind of how the wholesale market adjust to maybe supply/demand anomalies, so on this whole kind of conversation around SUVs, could you kind of provide some historical perspective perhaps about anomalies you might have seen in the past and kind of how long a correction might take in the pricing in the wholesale market?

I mean, I can probably comment on some anomalies in the past, but in terms of how long a correction takes, I think there is too many macro factors involved. But we are seeing, as you know highest SAAR we have ever seen and the bigger of the increase in the SAAR is related to trucks and SUVs. If I was thinking about that over a long period of time, that means a couple of years from now we will see lot of trucks and SUVs out in the wholesale market, which if there is demand, then we will be able to take advantage of that and buy and sell them. I think the other big variable that’s impossible to predict is first, gas prices and then second, the impact of gas prices. I know you remember back in the spring of ‘08 when gas hit $4 nobody would buy an SUV of any kind. But in October of that same year, gas was below $2 and things kind of went back to where they were. Since then when we have seen gas prices increase we haven’t seen the same knee-jerk reaction that we saw. So gas prices have been pretty low for a while and I think it’s provided a boost for trucks and SUVs. But it’s really hard to say what will happen going forward. I just think our model is best equipped to take advantage of whatever the market brings. We are not holding to any manufacturer or any type of product and we want to sell whatever the customer wants to buy.

I want to violate Katharine’s two question rule. Just one last follow-up I guess, what you are seeing right now, will you characterize as kind of normal ebbs and flows that you have seen in the market over time or is there anything that gives you longer-term more fundamental concerns?

Yes. We don’t see anything that causes us long-term concerns.

Okay, great. Thank you.

Thank you, Sharon.

Your next question comes from the line of Craig Kennison of Baird.

Good morning. Thanks for taking my questions as well. I know it’s early, but you did just enter the Boston market and I am curious if you have seen any or had any surprises as you enter that market?

We have been open for less than a week. So I really couldn’t – I am not going to comment.

Even from a staffing standpoint, you are able to staff the different types of positions you need?

We were able to staff. I will say Boston was a bit challenging with staffing, but our teams did a great job of finding a bunch of really great people and we are very excited about our go forward there.

And then in terms of technology, could you cover Tom, your priorities for the next 12 months in terms of digital and technology initiatives?

Well, our priorities are somewhat unchanged. We want to keep making sure that our customers have a great experience regardless of how they interact with CarMax, it could be from a desktop, it could be from a mobile device, a tablet or in the store and we are very focused on making the transition from their digital experience to the store simple and seamless so that the experience they have online matches up with the experience that they have in the store. And we are also pushing real hard over the next 12 months or so to make sure that our store teams are equipped with information that’s available regarding the individual customers to try to make their experience more personalized. We have a very big database of customers and we are going to make sure that we can access that information and that our associates in the store can access the information when the customers arrive.

Great. Thank you.

And also we just want to keep increasing capabilities of customers if they want to do more and more of the transaction online.

Thank you.

Thank you.

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

Good morning guys. Just a first question, Tom as we think about sort of these tougher comps, I mean basically we are looking at multi-decade lows in the zero to 5-year-old portion of the fleet in absolute terms. And certainly, 30-plus year lows as far as the percentage of the total population of cars outstanding. So I mean as we see that zero to 5-year-old bucket grow in the next 1 year, 2 years or 3 years, don’t you just sort of naturally – would you just naturally expect your same-store sales to recover as that addressable market recovers and sort of the pressure we are seeing here is just a function of the supply?

Well, I expect us to be able to comp our stores over a long period of time and I think there is lots of external factors that either help or hurt. I have always felt like the supply of zero to 5-year-old cars increasing is good for us. It’s an area where on a market share basis, if you look at an individual year-to-year basis, we have – it’s been kind of our sweet spot. So I mean I agree as the supply increases there, I think we will do better in those segments. What I feel even – what I also feel good about is coming out of the recession, we did a really good job of figuring out how to sell older cars as well. And I feel like we can do both. So you look at the CarMax consumer offering at zero to 10-year-old cars and I think we are pretty good across the spectrum at near new cars and then older cars with higher miles. I don’t think anybody does good a job reconditioning as we do. I don’t think anybody in a better position to take advantage of those sales as we are.

Okay. And then just sort of a follow-up and the second question, I mean when you look at the gap of new versus used pricing and then you look at the financing offerings that are at – in the new vehicle dealers for new vehicles. It just seems like it’s very compelling for a zero to 5-year-old or even zero to 10-year-old consumer to trip into buying a new vehicle, I mean if you look at zero to 5-year-old car, basically the gap on a monthly payment basis $100 are actually potentially significant and less depending on what kind of financing they get at their new vehicle dealership. I mean how do you kind of fight that tide, I mean and do you think you just need that supply plus pricing to come down to create a wider gap to drive those consumers back and to use vehicles, because it’s incredibly tight right now, I am just trying to understand how that dynamic might change and if there is anything you can do to help change it?

Well, it’s not like this doesn’t happen, it hasn’t happened before. There are always pockets or segments of near new cars that given incentive environment whether it’s through cash back or leasing, oftentimes consumers will make that decision. It doesn’t mean they won’t come back to us 3 years or 4 years or 5 years later when they are buying something different. And I do want to point out our average car is around $20,000 and the average new car is around $33,000. So the difference on average has not come down at all, in fact it’s widened. But it’s always true that at any given point in time, given – depending on the incentive environment that there are some closed calls there and I think it was especially true this quarter and that’s why I pointed it out.

Great. Thank you very much.

Alright. Thank you.

Your next question comes from the line of James Albertine of Stifel.

Good morning. Thanks for taking my question. Just another follow-up on the trends you are seeing in the new cycle. And quite frankly, you have lived through a lot of obstacles and a lot of other headwinds over the last 20 years. It doesn’t seem like there is anything you can’t weather, but it seems like this time might be a little different, particularly among the domestic manufacturers given the propensity to lease. Is there a higher likelihood that some of these new vehicles that are selling on the SUV and truck side go back to dealers rather than hitting the auction market and that – could that limit your availability of supply in the coming years or is that something that you considered and aren’t really worried about?

Well, it’s something we have lived through before in terms of percent of new car sales that are leased. I think the number now is around 30%. It’s been this high at times before. Generally, what that means is 2, 3 years down the road those cars will come back to the market in a kind of a more organized way. And dealers won’t be able to absorb the volume that comes back and a lot of those cars end up at auction and that’s what’s happened historically. And we have been able to take advantage of that in the past. I never look at a high lease environment as a negative for us when you think about supply 2 or 3 years later. If you think about this cycle of people getting out of a new car, if it remains that people get out of their car every 3 to 5 years, it really doesn’t make any difference whether it comes back through a lease channel or it comes back as an individual car, eventually they end up in the open marketplace and we have an opportunity to buy them.

Got it. And that ties I think with your 340 cars per month comment versus 50 per month average that you made earlier. There is not a capacity for the dealers to handle the off lease. So, I appreciate that color. And then a quick follow-up on the credit market now that we have finally seen a rate increase and if you look over the last few CAF securitizations, it appears as though the spread might be stabilizing, but really wanted to get kind of an update there as to what you think if we are near that stabilization point or even now that rates are up sort of optically consumers are now expecting higher rates, does that allow you now to sort of increase the APR and maybe even see that spread expand in the near term? Thanks.

Yes, this is Tom. As far as the spread to the customer go, that’s going to be really market-dependent as we have said in the past. Our first goal of CarMax auto finance is to provide a competitive offer to the customer and we will go where the market dictates we go. That said, we are constantly testing both up and down to make sure we are optimizing CarMax sales and CAF income at the same time. We have seen a little bit of cost of funds increase this year. We have been testing rates upward a little bit. But I really can’t give you any kind of forward-looking theory on where that spread will go, because it’s going to be market rate based. Historically, as rates have come up, we have been a little bit as the market has slower to adjust upward, because that rates can be sticky and conversely when rates have been coming down, you are usually a little slow to adjust downward because the market is going to drive that as well and you see a little bit of a benefit. But as far as going forward, yes, the market will tell. I think now that the Fed has given some guidance, I think about where they are going with interest rates that stabilize things from the perspective of spreads in the asset-backed market. We saw our spreads gap up in the last year versus prior deals even though we are in a lower interest rate environment, but I think some of that was uncertainty around what Fed was going to do.

Got it. Well, thank you again and best of luck in the remaining quarter.

Thanks a lot.

Your next question comes from the line of Lynn Walter of Wells Fargo.

Hi, thanks for taking my questions. Just regarding traffic, can you talk about, was that consistent throughout the quarter, any regions that you saw more impact than others?

Yes, we don’t give regional or quarterly differences. I said what it was for the quarter and that’s all the information we give.

Okay. Let me just ask one other one then if that’s okay. Just following up on your digital capabilities that you are talking about adding how should we think about the kind of investments required to bring those up to what you are talking about?

Well, a lot of the investment can be done within our normal spend over the course of the year. We have a pretty significant spend in both IT and marketing and a lot of the investments that we will be making can go over that normal course, but we are looking forward at what types of bigger investments might we need to make. And when we have something to talk about there, we will let everyone know.

Thank you.

Thank you.

Your next question comes from the line of Irina Hodakovsky of KeyBanc.

Thank you. Good morning, everyone. Two questions for you. The lower floor traffic that you called out in your release, what do you think are the drivers, is it the lack of the SUVs and trucks you pointed out as a difficult supply right now or is it perhaps competition and new entrants into the market who are competing in the standalone used vehicle stores?

It’s really hard to say, but I do want to point out, we did get enough traffic to sell 340 cars a month per store. And it was only slightly down. And then conversion was slightly up. And we ended up where we ended up. But in terms of traffic through the door, I think there is a chance that customers are being more prepared and are more likely to buy when they show up. And for us if we could get traffic that’s more prepared and more likely to buy, that’s just as good for us as it is if we just got plain old extra traffic. So, it’s not as easy an answer as you might think, but we had a lot of traffic in our stores during the quarter. It’s slightly down compared to last year.

Okay, thank you. And the second question for you. You mentioned in your opening remarks one of the headwinds impact in the comps was the lower supply of 0 to 5-year-old cars, is that as in general to what we have been hearing or are you seeing an actual sequential pullback in this supply from, let’s say, in the second or the first quarter?

Actually, while I mentioned supply, I said the supply was down in 5 to 10-year-old cars, not 0 to 5. And in 5 to 10-year-old cars, it just makes sense since the SAAR that you are building off of in years, I don’t know 6, 7 or 8 was dramatically lower than what the SAAR is today. Remember, we had a SAAR as low as 10 in September of ‘08. So, I was referencing the supply of older cars.

Thank you for that clarification. Thank you, guys.

Okay, thank you.

Your next question comes from the line of Michael Montani of Evercore.

Hey, guys. Good morning. I wanted to ask about if you could just talk us through how you think about managing the business in terms of balancing inventory turns with gross profit dollars per unit. Generally speaking, some of the publicly traded dealer peers have shown a little bit higher used unit comps, but then they have also shown greater erosion in terms of GPUs. So, just trying to think through how you would run the business and any tests you may have had tweaking either of those two elements?

Yes. We have talked about this in the past. We run pricing test on a pretty regular basis. You can also see we have been very consistent with the margins that we have been able to achieve. So look, there is no way to go back and say, look what if we had lower prices, how many more cars would we have sold? My guess is we probably gave up a little bit of share by maintaining our prices during the quarter, but it’s impossible to quantify. I don’t think however that we gave up gross margin dollars and I don’t think that we – I think we try to make the decision that’s in the best interest of our shareholders each and every quarter. So, we did see the decline in margins that some of the other publicly traded auto retailers reported ending September. And it maybe helped their comps a little bit, but as far as we are concerned, we can only make the best decision we can with the information that we have and that’s what we did during the quarter. And we are okay with the results.

Okay. And then if I could just follow-up on one which is the leverage point. I believe in the past, you have said 4% to 5% being the comp that you would need to show leverage. And obviously, the commentary today is that there is no change to the outlook for future year store growth. So, should we assume that’s the same, because I know there is a lot of initiatives that you guys are working on in terms of cost to try and prove that as well?

Yes, we think – we have always said kind of mid single-digits. We have never really put an exact number on it. It’s also dependent on the rate of growth during any given quarter. It’s also dependent on the type of growth during the quarter, opening up the big metro markets, more expensive than opening up smaller stores. And as you saw during this quarter, there is occasionally some timing of expenses that’s going to impact it, but I think if you think about it over a long period of time with the growth plan that we have publicly announced mid single-digits or so, I think we can leverage our SG&A dollars.

Thank you.

Thank you.

Your next question comes from the line of Bill Armstrong of CL King & Associates.

Good morning, Tom. Just getting back to the SUV light truck mix, yes, I mean, so if we look at total industry sales 2012 through ‘14, about 50% of total sales were light trucks, so call it SUVs and pickups. Your sales and inventory mix clearly is much less. So, are you seeing – are you not seeing that many of those vehicles available for sale or is it they are maybe not in the condition that you want to re-retail, like what – there seems to be a disconnect there?

Did you say it – just I didn’t hear what you said about the mix, did you say 50%?

50% of all car – vehicles sold from 2012 to 2014 were light classified as light trucks, so SUVs and pickups basically?

Yes. I haven’t heard that number before, but I believe you, but that’s never been the case for us. I mean, we had always been in the mid-20s. So this isn’t...

Not the same metric.

Hold on a second. Our 23% is medium and large SUVs and pickup trucks. I think the 50% includes crossovers and smaller SUVs. So that’s not in our number. And I don’t have that number handy to tell you what the mix was. I think in general over time, we are going to look a lot like the industry looks. Our sample is very large. We are very widespread across the country. And in general, we are going to look like the industry looks over time. I mean that’s where our supply comes from and we are going to match up consumer demand. It’s never going to be exact particularly on a quarter-to-quarter basis, but if you look at what we have historically reported in trucks and SUVs, it’s generally been in the mid-20s, sometimes in the high 20s. This quarter was 23%. It was up a point from the time before, remembering that we are talking about two different measures.

Okay, got it. Do you feel like maybe you are missing some opportunity then with the SUVs or not necessarily?

Well, as I have said I think during the quarter, there was a chance that we could have paid more. It’s not like the cars weren’t out there, but we are always trying to deliver a great value to the consumer as well. So there are always times when certain things at the auction, we just think they are too expensive and we don’t want to buy them and then turn around and resell them, so we wait. And I think the same thing is true here. We have been around a long time. We have seen cycles go up and cycles go down. And as I mentioned earlier, who knows what happens with gas prices. You see a big spike in gas prices and there is a good chance our SUV mix would go up during that time because those cars will be cheaper and be a better value to our customers. But I did mention it during the quarter we saw that there was a lot of pressure on SUV pricing.

Got it. Okay, that makes sense. If I can just sneak one in, extended protection plan revenue lagged vehicle sales a little bit anything to call out there?

Nothing in particular, in general we would expect that business to grow with unit sales. This quarter, we had some adjustments in the return reserve. Remember that’s like $100 million reserve, kind of plus $1 million reserve and we are going to see small movements in that based on experience as we see it, as we go forward, so nothing really exciting to report, it’s just an adjustment.

Okay. Thank you.

Your next question comes from the line of Rick Nelson of Stephens.

This is Nick Zangler in for Rick. I was just wondering – are you guys considering any changes in the policy of selling recalled vehicles, obviously one of the larger dealer group sees those sales, I think to enhance their brand name and obviously you guys have a very strong brand name, but any thoughts there and in general how do you recall cars in that view operationally?

We talked about this on the last call. Remember we don’t have – we are not authorized to repair recalls at our stores. And obviously, the recall environment has changed over the last several years. We think the most important thing is being completely transparent with our customers and making sure that they are fully informed. And also that they register on the manufacturers website because I mean we can sell them a car today and a recall could come next week and it wouldn’t have mattered whether or not we did anything to the car. And we think it’s very important that they are notified. We are the only retailer that – we are the only car retailer that has a direct link to the NHTSA website. And it’s VIN-specific and we pre-populate the VIN so any customer that’s on the CarMax website can look up any – all recall information on each and every individual car. And then, during the sales process, we make sure that we point out to every customer the recall status. We help them register with the manufacturer and historically the relationship as it relates to recalls between the manufacturer the customer who owns the car and we want to make sure that customers are fully informed and get that information going forward. So our policy is 100% transparency as it relates to recalls.

Great, understand. And then just in general, where do you guys stand with third party lead generators what was the proportion of sales through those sites in the quarter?

We never talk about proportion of sales, but we have been asked about Cars.com and AutoTrader.com and we have not used those sites for a long time.

Great. Thank you very much guys. I appreciate it.

Your next question comes from the line of John Healy of Northcoast Research. Your next question comes from the line of David Whiston of Morningstar.

Thanks. Good morning. I wanted to go back to the distinction between SUVs and crossovers, on the crossover side for vehicles like RAV4, CR-V, Chevy Equinox, can you talk a bit about what kind of pricing you are seeing in auction for those vehicles?

I don’t have that information handy, but those are good sellers for us. But I don’t have the mix in front of me. I am sorry.

What I am basically asking, are you having inventory issues there, it sounds like similar to what you are talking about the SUVs is that an issue at all?

Yes. I don’t think so.

Okay. And Tom Reedy, you mentioned before Q&A that you are on the low end of your leverage, so can we infer that you are not going to pay back the incremental revolver borrowing anytime soon?

I think that’s fair. I mean, the revolver balance is going to be something that’s quite seasonal. As you know we buy up inventory pretty significantly in the fall and we sell through it in the winter and into the spring. So it’s there to manage liquidity. But as I mentioned, I think we have kind of got a target range of leverage we would like to manage to. I would expect to keep adding debt as we go forward and buying back stock to manage to that level. And it wouldn’t be out of the question for us to do something. Think about the revolvers kind of like if you look at our conduit facilities on the asset back side. It’s something that we can use to manage liquidity, but then when you get critical mass, it would take it out of a longer term instrument.

Okay. Thank you.

Your next question comes from the line of Paresh Jain of Morgan Stanley.

Good morning everyone. I just wanted to follow-up on Mike’s question earlier, so if I am hearing you right, stable GPU seems to be the more important metric here for CarMax, am I thinking about it right or how would you characterize your most important metric, is this comp or is it GPU?

Our most important metric is sales. And then we have just been able to manage gross profit per unit very consistently over time. We want to make sure that we have given our consumers a great value. One of the things that we are very focused on is continuing to aggressively manage our costs because the price of the consumer is not just the margin but also the cost that we put into a car during the reconditioning process and we continue to put enormous efforts around the engineering that we – we have turned our reconditioning process into an engineer process and we want to continue to try to figure out how to lower our costs, so we can still deliver great price to the consumer and maintain our margin so that we are delivering a good return for our shareholders.

Understood. And then on a most strategic front, I wanted to talk about dealer partnerships with ride and car sharing businesses, we see some of these businesses big and small, looking to partner with dealers on two fronts, either to buy or sell a car or in some cases, just utilize of used car sitting on dealer lots and pay dealers a fee. How do you feel about these partnerships between ride sharing firms and dealer businesses, are there potential hurdles in this type of arrangement or maybe there are no issues and it make sense to make some money on used cars while sitting on the lot?

We haven’t really explored those avenues for us. The one thing I would say is it is an incredibly fragmented business and a huge marketplace. There are over 40 million cars –used cars sold annually in the U.S. We are very small fraction of that. So as I said, we haven’t looked at those things in particular, but we try to pay attention to all of things that are available in the marketplace and see if we think there is an opportunity for us. But right now, our biggest opportunity is to continue to grow the business in markets that we are not in, continue to add stores back into places where we already have a presence. We are only reaching about 60% of the U.S. population. I think we have incredible growth in front of us. And right now, those are the kinds of things that we are focused on.

Got it. Thank you.

Your next question comes from the line of Robert Iannarone of RBC Markets.

Hey, guys. Robert Iannarone on for Scot Ciccarelli. Just a couple of quick questions for you, some of the credit data that we have tracked has indicated outsized growth in 72-month plus financing arm, I was just wondering if you could give us any commentary on what you are seeing in customer behavior and their desire for longer term loans for their vehicles?

Yes, I think the way I can respond to that is that like I said we are going to be a market-driven lender at CAF and we are going to make sure we are doing the best thing for our customers. And it’s always a balancing act. So, we are going to be continually testing and assume it makes sense. I think recent – the data you might be pointing to recent Experian [ph] data shows about 15% of used volumes getting done at terms longer than 72. We are not sure how much of that is actually pushing out more than a couple of months. But as I said, we will stay competitive. If we see the need to move, we will, but at this point, we don’t feel comfortable to rush into any longer term financing.

Great. Thanks. And just one more on advertising so second quarter in the row now we have seen the advertising expense tick up. You have certainly commented on this in the last couple of calls for us. Just wondering if we should expect that to normalize going forward that you are in the Boston market and you have launched this new campaign?

Yes, we are going to make decisions throughout the quarter as well. But as I said, this increase on a quarter-over-quarter basis would not be typical for us.

Okay, thank you.

Thank you.

Your next question comes from the line of Matthew Fassler of Goldman Sachs.

Thanks a lot. I got back in line and I guess there was room. I have two follow-ups for you. The first relates to write-downs. What can you talk about in terms of the drivers of the tick up in write-downs? How would you relate it to underwriting standards? You talked about seeing higher quality credit applications etcetera. Just give us a sense if you could about how to think about those write-downs and how we might model of them out from here?

Are you talking about CAF losses?

Correct.

I am sorry, Matt. Yes, I think what I mentioned about the close in the quarter was that it was a quarterly – this quarter phenomenon for the last several, several, several quarters, in fact, most of them, we have seen growth in kind of all areas in the credit spectrum this quarter. We saw decline in application volume and lower FICO stuff and a continued growth in the higher end stuff, the 650 plus. That’s what I meant by the traffic. That’s unrelated to what’s going on with charge-offs. Charge-offs has to do with what’s in the portfolio and it’s been put in there over the last several years. And the way I characterize it is we have had a long stream of favorable experience and at some point, it was – the tide was going to turn in. Things were probably going to normalize. I would probably characterize it as giving back some of the favorable experience we have had over the last several quarters. It’s too early to tell what that means from a go-forward perspective. But as I mentioned, the reserve balance today is at the same level as a percent of receivables that was last year.

And is there anything that you saw in recent delinquency data that would lead you to be incrementally concerned or do you feel like the book is still in very good shape?

Now, as I said, we have got a quarter’s worth of data and we will take it as it comes.

Got it. And then my next question just you bought back an awful lot of stock during what was obviously a tough quarter, what would you need to see? What would it take in terms of fundamentals of the business to lead you to slow that buyback down?

Well, Matt, as I said I think we have kind of got into the lower end of the leverage range that we have been targeting. And on a go-forward basis, we will continue to do it, to manage the capital structure going forward. I can’t comment on what would it compels do anything, because market conditions could be – in the future could be all over the board. I just think you should take away that we are going to continue using it. We are going to continue using a programmatic approach. You saw during the quarter that we stepped up volumes based on what the stock price did. But on a go-forward basis, it’s probably more of managing the structure perspective rather than moving to a new capital structure.

Got it. Thank you very much.

Yes. Thanks, Matt.

Alright. There are no more calls. I want to thank everybody for your interest in CarMax. And of course, I want to thank all of our more than 22,000 CarMax associates for all they do everyday to make CarMax a success and a great place to work and happy holidays to everyone. Thanks for joining us. Bye.

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