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

Brian Nagel - Oppenheimer Sharon Zackfia - William Blair Scott Ciccarelli - RBC Capital Markets Craig Kennison - Baird Matthew Fassler - Goldman Sachs James Albertine - Stifel Michael Montani - Evercore ISI Brett Hoselton - KeyBanc Mike Levin - Deutsche Bank Liz Suzuki - Bank of America Bill Armstrong - C.L. King & Associates Seth Basham - Wedbush Paresh Jain - Morgan Stanley Nick Zangler - Stephens David Whiston - Morningstar Irina Hodakovsky - KeyBanc Rod Lache - Deutsche Bank

Good morning. My name is Brunt and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax Fourth Quarter Earnings Release 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. I would now like to turn the call over to Katharine Kenny, Vice President Investor Relations. Please go ahead.

Hi, thank you and good morning. Thanks for joining our fourth quarter and year end earnings conference call. On the call with me today are Tom Folliard, our Chief Executive Officer; Bill Nash, our President; 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 28, 2015 with the SEC and we will be filing our most recent 10-K shortly. As always, I hope you will all remember to ask only one question and a follow-up before getting back in the queue to give everyone a chance to ask a question. Thank you. Tom?

Thank you, Katharine. Good morning, everyone. Thanks for joining us. We had very solid year in fiscal 2016, where total revenues grew to more than $15 billion and we sold over 1 million vehicles total both in retail and wholesale for the first time ever, about 620,000 used cars and about 395,000 wholesale cars, while still – while also delivering double-digit EPS growth for the year. Some key drivers for the year. Used unit comps increased by 2.4%. Total used units grew a little over 6.5%. Wholesale units grew by 4.9%. CAF income, up 6.7% to more than $392 million. Net income for fiscal ‘16 up 4.4% to $623 million and EPS up 11% to $3.03. Proceeds from our legal settlement benefited our fiscal 2015 net income by $12.9 million or $0.06 a share. Our data for the year indicates that for calendar year 2015, we increased our share of the 0 to 10-year-old used vehicles by approximately 1%. And we continue to focus on returning value to our shareholders through our stock repurchase program. During the year, we bought back 16.3 million shares at a cost of $971 million. For the fourth quarter, used unit comps increased by 0.7%, driven by an improvement in conversion and total used units grew by 4%. Our total web traffic increased by 11%. Total wholesale units, up 2.3%. CAF quarterly income grew by 2.2% to $92 million. Net income for the fourth quarter declined by 1.5% to $141 million and EPS rose 6% to $0.71 a share. Remember that the impairment-related charge in this quarter reduced our net income by $5.2 million or $0.03 a share. While in the previous year’s fourth quarter, net income was increased by the adjustment to capitalize interest expense of $4.2 million or $0.02 a share. I will now turn it over to Tom Reedy to give you some details around CAF. Tom?

Thanks, Tom. Good morning, everybody. As Tom mentioned, CAF income grew by 2% compared to the fourth quarter of fiscal 2015 and average managed receivables grew by 14% to $9.5 billion. For loans originated during the quarter, the weighted average contract rate charged to customers was 7.5%, up from 7.2% in last year’s fourth quarter. Total interest margin declined to 5.9% of average managed receivables compared to 6.3% in the fourth quarter last year and 6% last quarter. For the quarter charge-offs and loss provision were in line with our expectations. The year-over-year increase in loss provision reflects both the favorability we commented on in last year’s fourth quarter and the growth in receivables. Our ending allowance for loan losses at $95 million was 0.99% of managed receivables compared to 0.97% in last year’s fourth quarter. CAF net penetration was 41.7% compared to 40.9% in last year’s fourth quarter. This increase reflects the mix of applications in the stores, where we continue to see growth at the higher end of the credit spectrum and less volume at the lower end. Net loan dollars originated in the quarter rose 7% year-over-year to $1.3 billion, that’s due to combination of growth in CarMax sales and our higher penetration at CAF. Percent of CAF penetration attributable to our sub-prime test was similar to last year 0.7% versus 0.6% of the sales in the prior year. As mentioned in the press release, we are comfortable and plan to continue to originate these loans at the same pace, a targeted volume of 5%, as CarMax’s overall Tier 3 sales. Tier 3 financing, as a percent of sales, was 15.1% compared to 17% in the fourth quarter of fiscal 2015 largely due to the reduced volume of lower credit applications I mentioned earlier. In Q4, we continue to experience a year-over-year decline in the number of credit applications across the lower end of the credit spectrum and moderate growth at the high end. During the fourth quarter, we repurchased 3 million shares for about $156 million. For the fiscal year, as Tom said, we repurchased 16.3 million shares. And since inception of the program, we repurchased 46.4 million shares. At the end of FY ‘16, we had 1.4 billion remaining under the current authorization. Now, I will turn the call over to Bill.

Thanks, Tom. Good morning, everyone. As a percentage of our sales mix this quarter, 0 to 4-year-old vehicles increased to approximately 77% compared to 75% in the fourth quarter of last year. Midsize, large SUVs and trucks, as a percentage of sales, were flat approximately 24% in both this year and last year’s fourth quarter, which is up slightly from 23% in the third quarter. SG&A for the fourth quarter increased about 1% to $334 million. This growth reflects the 10% or 15-store increase in our store base since the beginning of the fourth quarter of last year largely offset by a decrease of $14 million or $97 per unit in share-based compensation expense. During the fourth quarter, we opened 5 stores, 3 were in new markets, 2 in Boston and 1 in Peoria, Illinois. We also opened our sixth store in Atlanta and a third store in St. Louis. In the first quarter, we expect to open 2 new stores in new markets, Springfield, Illinois and our first store in San Francisco. Before I turn it back over to Tom, I want to take a minute to talk about how it’s an exciting time for CarMax. Looking back over the past 23 years, we couldn’t be more proud of the progress that we made. Our store base has grown to 158 stores, and as Tom mentioned earlier, we sold over 1 million vehicles this fiscal year for the first time ever. Our customers continue to give us high marks for excellent customer service and we have a world class culture. We continue to execute our growth plan and currently plan to open 15 stores in fiscal 2017, while also focusing on returning value to our shareholders through our share repurchase plan, but we are never satisfied. And for those of you that have followed us for a long time, you know that this is the case. For our customers, we have to be able to meet them where and how we want to do business. Nearly 90% of our customers have visited one of our digital properties prior to the purchase. And by the end of fiscal 2016, over half of our total visits came from our mobile site or mobile applications. We need to ensure that these customers receive the same superior customer experience online that they have always received in our store. We are currently in the process of rolling out a new adaptive and more personalized website redesign and we expect it will be fully rolled out by the end of this month. We will also continue to test different components of the selling process online to better understand our customers’ needs. We are also never satisfied with our execution. We will continue to focus on becoming more efficient and reducing waste throughout the company. We will continue to equip our associates with the tools that they need to make their job easier. Let me give you two quick examples of enhancements that we are developing. One is a mobile appraisal platform. Remember, we appraise more than 2 million vehicles a year. And this will help our buyers reduce our appraisal time and increase accuracy. Another example is an improved transportation system that will help us realize efficiencies when moving the millions of vehicles that we ship annually. It is this kind of continuous improvement that has driven our success in the past and that will support our innovations in the future. Tom?

Thanks very much, Bill and Tom. And with that, we will open it up for questions. Operator?

Thank you, sir. [Operator Instructions] Your first question comes from the line of Brian Nagel with Oppenheimer. Please go ahead.

Hi. Good morning.

Hi Brian.

First off, Tom, congratulations on your retirement, it’s becoming and Bill, congratulations on the new appointment.

Thank you, Brian.

The question I have, I wanted to just talk about gross profit for a minute. Clearly, that’s been a big focus of investors in light of what some of your competitors have been talking about declining gross profits, now we look at the numbers you reported, the results you reported today, so gross profit was down slightly, I don’t know Tom, you probably say it’s the noise with the $39 year-on-year, which...?

I am.

I answered that question first.

What’s your next question?

The bigger question is, if you look at the drivers of that, kind of the puts and takes behind gross profit, have those changed at all and are you seeing any type of pressures out there that maybe, within your gross profit in the used vehicle space, that maybe more, maybe reflective of some of the pressures that others are seeing and you are handling those better?

I mean, I think it’s an overall inventory management process for us. And I think starts with the by having the right car in the right place at the right time. And that allows us to be able to deliver an exceptional value to the customer. And some of what I talked about last quarter, we talked some big SUVs are a little expensive, so we didn’t buy them. We didn’t buy as many. And that allows us to manage our margin, I think very efficiently. We transfer cars that customers requests. It’s about a third of our sales. So that allows us to turn our inventory quickly. I think our turns help us manage our margins pretty well. And it also allows us to continue to test the margin variability. We are big enough now that we can test pockets and markets and different types of product all across the country and learn a lot about price elasticity. And then that’s reflected in the ultimate margins that we achieve and the sales that we get. So I am very pleased with the quarter and with the results and a positive comp based on one of our tougher comparisons last year. And yes, I think we can get better at this as time goes along. I think we are better at managing our inventory and our margins than we were a few years ago. And with continued use of external and internal data and training and development of the process, I think we will just continue to get better at it. So I am pretty pleased with the progress that we have made and the results we have been able to deliver.

Thank you very much.

Thanks Brian.

Thanks Brian.

You next question comes from the line of Sharon Zackfia with William Blair. Please go ahead.

Hi, good morning.

Hi Sharon.

I guess a question that we get asked a lot, so I will throw it at you. There seems to be some thought process that perhaps the new car dealers have figured out a way to be more aggressive on their gross profit per car target and make it up in some other part of their business and therefore become more of a competitive threat to you kind of by undercutting prices, I am just, the pervasive thought on Wall Street at this point and I am just wondering if you have any commentary, any context you could give us on that?

Well, I think the biggest thing to look at is just our results and our volumes. During the quarter, our average stores sold around 340 cars a month per store. That’s across the entire chain, including new stores. If you look at used car sales, our used car sales compared to the – I am only going to use the public new car deals as an example here, there are many more franchise deals, as you know. But we sold more used cars during the year than the next four competitors combined. So I feel like our consumer offer is clearly resonating with consumers and we are able to grow our business year-after-year. We once again comped our stores by 2.5% for the full year, a very good number for a company of our size. And I think given the choice consumers still, after they shop around, pick us more often than not. So I think the results speak for themselves. If you look at franchise dealers total for the year, used car sales were up by 2% across all the franchise dealers. And I think you have to look at it on a broader scale and not just focus on the publicly traded auto retailers because they are very small sliver of used car sales in the U.S.

That’s perfect. Thank you.

Thank you, Sharon.

Your next question comes from the line of Scott Ciccarelli with RBC Capital Markets. Please go ahead.

Good morning guys. Looking for an opinion, so why do think you guys are seeing a dip in credit apps at the low end of the spectrum?

Scott, I am not sure that we really know, but I am not sure that that’s not good for us. If you look at our mix of sales in Tier 3 in this quarter, we were down 2 points, so we are 17% of our sales last year’s fourth quarter, 15% this year’s fourth quarter. As you know, that’s been less profitable slice of business for us. It’s one that we are very comfortable being in, one that I have said in the past, I think we provide the best possible deal for customers in that credit segment and we are very happy to be able to deliver a great consumer experience and a high quality car to those customers. But if you look at a base from which to grow your business, if you had a little higher credit profile, it’s not the worst thing. You have been around long enough to know that, that percent of sales for us was at one point is non-existent and it’s gone from two to I think as high in 1 year as 19 might have been our highest full year. So we are down a couple of points for the year. You could argue that, that loss of credit apps, volume of apps hurts comps by a little bit, which it does, but it doesn’t hurt profits by as much at it hurts the comp. So we continue to build our brand. We continue to advertise to get any consumer that want to come to CarMax, but it’s not that bad if it shifts a couple of points in the other direction. But in terms of explaining the volume of applications, it’s very difficult to do.

Got it. And just for context, is the Tier 2 guys still kind of dipping down, because that was something that you had suggested previously, where the Tier 2 guys were scooping up some of the stuff that would historically have fallen into the Tier 3 bucket?

Yes. Scott, I think that’s – I would say that we continue to see some pretty aggressive behavior from our Tier 2 lenders. And that combined with the lower number of low credit applications both of those impact Tier 3’s ability to get customers, right. I mean, the byproducts of that is what they are seeing might be a little bit less than what they are seeing before. Tier 2, by the way is down slightly this quarter year-over-year as well. But – and as you saw cap was up and other meaning people will bring financing to the table, was up a couple of points also. So that just goes, falls right in line with the fact that we are seeing higher credit quality through the door that, that others up even more than CAF.

And I think Scott, some of the shifting you are referring to is a reflection of our partners who are fantastic partners getting more and more experience with the CarMax origination channel and being more comfortable with how they originate. So that’s nothing but good for us.

Got it. Alright. Thanks a lot guys.

Thank you, Scott.

Your next question comes from the line of Craig Kennison with Baird. Please go ahead.

Good morning. Thank you for taking my question as well. It’s on the wholesale business, wholesale volume growth decelerated to about 2% or 3%, are you seeing any impact at all from some of these emerging peer-to-peer remarketing channels or is there another dynamic at play?

I don’t know, I have said and it has been true over time that I think wholesale will grow approximately with sales over time. But it would never be exactly attached. If you look at over a multi-year window that has been true, it’s very difficult to evaluate where – we had a buy rate of around 30% for the quarter. So that’s about – that’s as high as it gets for us. And we are very pleased with that. Some of the peer-to-peer stuff you are referring to are still very, very small, particularly compared to our size and then vary only in a few markets. So we haven’t seen any impacts of any statistical significance that we could attribute directly.

And as a follow-up to Bill, you mentioned the mobile appraisal platform you are piloting or starting soon, do you think that will drive volume at wholesale as well?

The intention of the website isn’t necessarily drop wholesale volume other than highlight the appraisal process. So if we highlight the appraisal process, inherently that will end up driving some wholesale traffic.

Great. Thank you.

Your next question comes from the line of Matthew Fassler with Goldman Sachs. Please go ahead.

Thanks a lot and good morning. I want to ask you about the performance of your new stores, I know that our ability to measure them is not perfect, but it seems like the volume productivity per unit for the vintage that’s opened over the past year is down. Is there something about timing that would make a difference? Is there something about the markets that you are entering that would make a difference, because it just seems like anyway you slice that the used vehicle units per average new opening are a bit lower than they have been in years past?

Remember, we have small format stores mixed in there too, which are a fraction of what some of our biggest stores are. And also as a percent of our opening, I mean, as a percent of our stores that we are opening each year, the last few years that number is actually going down, because we have been consistent at that ‘14, ‘15 number. So this year, the amount of stores we opened as a percentage of the base has gone down. So, you would expect the percentage of units delivered from the new stores to go down unless we increase the number of stores that we build and we change the profile of the size. What I would tell you is that we are continuing to open stores, because they are delivering a great return. And remember that we have very long models for sales, 30 plus years. And we have some stores – we have a whole batch of stores now that are less than 5 years old and are still on their growth curve. So, we are pleased with the performance of the new stores, that’s why we keep opening them and we think they are delivering a great return. But mathematically, it’s not going to deliver as much to the total, because it’s less of the base. And then remember some of our big old stores are very big.

I guess, I follow up by saying that even if you adjust for store size which we do and you adjust for the role that newer stores have in the mix as a percent of the base, you do all the math, it looks like this less vintage from a unit perspective was a little off. So, if you think about some of the new markets like Boston and you just tell us what you see, it is the unit count kind of in like sized stores different from it had been? And if you think the trajectory in some of those markets is going to be different, why would that be the case?

Well, I haven’t looked at. We really – we look at it on a – when we build the store, do we think its on pace to deliver a great return and we are comfortable with the stores we have been building. Boston has been open for 4 or 5 months. We would never make any determination on any market after 4 or 5 months having done this for 23 years. I can just say we are pleased with the openings and that’s why we keep building them.

Thank you.

Your next question comes from the line of James Albertine with Stifel. Please go ahead.

Great. Thanks for taking the question as well. I wanted to understand I don’t think I heard a comment about it, apologies if I missed it, comment around traffic for the quarter. And what I am trying to get at here is as your online traffic grows, how do you think that impacts consumer’s decision to visit stores or multiple stores? And do you think and in fact, there could be some cannibalization going on as it relates to them? Thanks.

Well, there is – I didn’t mention traffic specifically. I did mention that our comps for the quarter were driven by conversion. So, our traffic through the door was down slightly and our traffic – and our conversion was up slightly delivering a 0.7 comp for the quarter. In terms of the goal of the website and the goal of driving traffic, it’s twofold. One is to drive just raw traffic and the other one is to improve the likelihood of the traffic that shows up to buy a car. So, if a customer – as Bill mentioned, if a customer wants to do more of the process from home, they have those tools available on our website that can be more prepared when they show up. And to be honest with you, it doesn’t matter to us whether we get a few less customers who are a lot more likely to buy or more customers that are just as equally likely to buy. So, it’s very difficult to measure that, but it’s kind of a multifaceted goal with the website. People are doing a lot of research online. There is a lot of data out there that’s telling you that people are visiting less stores than they used to before they buy a car. So, it’s really, really important that our website provides a great education for the customer and when they show up, they are more likely to buy. So, that’s kind of the goal of the website is to educate and then to deliver customers to the store and hopefully, they are more likely to buy.

I appreciate that color. If I may, just a follow-up on that topic. Do you envision a point at which the entire transaction will be possible online? And as it relates to that, is there anything that you are seeing either among competitors or among your own consumers and what they are telling you they desire that would accelerate spending around online versus your anticipated spending maybe a quarter or a few quarters ago? Thanks.

Well, Bill mentioned enhancements to the website and continuing to improve our mobile experience for our customers. So, if you look at where we are spending our dollars, there is no doubt, it’s shifting towards mobile, it’s shifting towards the website, because that’s where our customers are, that’s where we need to make sure that we meet them however they want to be met. And we want to make sure that they have the capabilities to do parts of the transaction or all of the transaction online. I will tell you that the average customer at CarMax has a trade in. The average customer at CarMax needs a loan, has to go through a finance process, sometimes has negative equity, and it’s not as easy to do a $20,000 transaction that is multifaceted, which oftentimes includes appraising the car that they are driving and do the entire transaction online. I am not saying that we won’t do that and we won’t have those capabilities, but that’s a sliver of the customers that we actually deal with. And what we are really, really good at in our stores is helping people find the right car that they need and the budget that they can afford, matching them up with the right credit offer, making sure we give them a fair offer for their trade in, which almost always requires looking at the car and making a fair offer after you have assessed its condition. So, we are going to continue to drive towards giving the consumer more and more capability to do whatever they want to do online and it may someday include consummating the whole transaction, but there is a large segment of customers who really can’t do the whole transaction online due to those other pieces that I mentioned.

That’s great color as always. Thanks so much and I will get back in queue. Thank you.

Your next question comes from the line of Michael Montani with Evercore ISI. Please go ahead.

Hey, guys. Good morning. I just want to ask about the comp side of things and what it is maybe that you are seeing out there that can help the comps to continue to sequentially accelerate. When you think about the 0.7 is definitely better than what we are looking for is encouraging. But do we need more used car price declines from Manheim or how should we think about the leverage that is in place to get to 4% plus?

Again, that’s a – there are multiple things that go into stores comping and the comp base. Remember, we continue to build stores that back into existing markets, which hurts comps. We continue to – as Bill mentioned, we continue invest in our website to drive more customers to our store. We continue to advertise to build our brand. I feel like everything that we do as a company, working on efficiencies, trying to lower our cost, trying to keep our prices competitive will deliver comps over a long period of time. I think we have shown the ability to grow a very big base of business over a very long period of time and I expect to be able to do that in the future, but there isn’t really one button that you push to drive comps. I talked earlier about margin management and inventory management and having the right car in the right place at the right time. All of those things contribute to comps and those are things that we are focused on as a company to continue to improve.

Okay. And just in terms of the quarter where we saw the GPUs come down a little bit, but the comps accelerate a bit, I mean, how should we think about that trade-off then going forward? How would you describe the fourth quarter on those two metrics and the balance thereof?

With the first question, we have managed our margins pretty consistently over a period of time. I think the margins were down $39ish for the quarter year-over-year. That’s within our level of ability to manage. So, I have always said we would – we tried to do as much price testing as we can and we try to balance margin and sales. And we are pretty pleased with the results for the quarter, but that’s how we will continue to look at it going forward.

Alright, thank you.

Your next question comes from the line of Brett Hoselton with KeyBanc. Please go ahead.

Good morning, Tom and Bill and Katherine and thank you very much or I mean congratulations on your retirement and Bill, your promotion.

Thank you.

Thank you, Brett.

I wanted to ask you about gross profit per unit. So at my family’s dealerships, we are going to do over 5,000 used cars this year. I can tell you if you pickup the phone and you called anybody at our dealerships today, they would look forward to or will be very pleased if the Manheim Index went down. They would be very pleased, because that means our cost for goods sold would go down. Therefore, the gross profit would likely go up, because of spread between new car prices and used car prices would increase and the volume will go up because of simple price elasticity demand. And so higher gross profit, higher volume equals better total gross profit. That is a simple idea, simple argument that for some reason. My question to you is the only thing that kind of argues against that is that if I look back at your results historically, it appears as though during periods of time, when gross or when the Manheim Index inflected somewhat, your gross profit per unit actually went down a little bit, which has kind of counted what happens at our dealerships. And I am wondering, do you have any idea or first of all, what’s your sense or what’s going to happen to your gross profit per unit and your volume when the Manheim Index or if the Manheim Index goes down? And then secondly, can you explain what appears at least to my mind to be a bit of an anomaly that took place kind of in that before the last downturn?

I am not really sure where you ended up there, but our margin…

Let me simplify it.

I will just say I will answer it. Our margin dollars have been very consistent. When the Manheim Index goes down and we can buy cars cheaper, we want to give our customers a better deal. So we have chosen whether it’s right or wrong to not increase our margins when our prices go down because we want to give our customers a better deal. And we are building our business over a very, very long period of time and we want them to leave and say, why I got a really fantastic deal. The next time I buy a car I want to buy it from CarMax. So you can argue with our motives but when our – when our ability to buy a car is cheaper, we have chosen to pass those savings onto our customers as opposed to taking it into margin. That’s just what we have done. The biggest example I can give you is during the recession, our average retail price dropped by over $2,000 in three months and we kept our margins and we bought cars cheaper over that period of time by that same amount and we chose to keep our margins flat. That’s just the decision that we made. I think we gave a whole bunch of customers a great deal and hopefully made customers alike. That’s how we have chosen to run our business. It doesn’t mean that we will do it exactly that way going forward. But when we have the ability to buy cars cheaper, we pass those savings onto our customers.

Okay. So maybe the quite simple question would be if the Manheim Index were to go down by 1%, 2%, 3%, 5%, or something along those lines, you do not anticipate that your gross profit per unit is going to go down, you probably will maintain that and just simply increase your volumes, is that conceptually how you think about the…?

Now, every market condition has different variables and we evaluate all of them and we try to make the decisions that are in the best interest of our customers and our shareholders. So I can’t tell you exactly what’s going to look like going forward. You can look at our history. And we watch depreciation go up, down, Manheim Index go all over the place and we managed our business very consistently through that time. And each time we see a downturn or an up-tick or appreciation or depreciation, we evaluate all those variables and we try to make the best decision we can.

Yes. So I guess maybe asking it in a different way, you do not anticipate making less gross profit when the Manheim Index goes down?

I just answered that question.

Great. Thank you so much, gentlemen.

Thank you.

Your next question comes from line of Rod Lache with Deutsche Bank. Please go ahead.

Good morning, guys. It’s actually Mike Levin on for Rod.

Hi Mike.

Congratulations again, Tom on your retirement.

Thank you.

I think over time, your guys sales have correlated much better with new car sales versus used cars and we are looking at expectations for new car SAAR in the U.S. moving forward, most people are expecting sort of a flat towing demand environment, just wanted to kind of get your thoughts around how you think about CarMax’s growth within that sort of plateauing SAAR?

Well, I have always – I have said this before that I think that largely, we move directionally with SAAR, but it’s not an exact science. And making a forward-looking prediction on SAAR is something that’s – it’s not something that we really do. And what we focus on is trying to deliver the best deal and the best consumer offer that we can each and every day. And I can’t really comment on what’s going to happen over the next 12 months or 24 months depending on movement in SAAR. I think it’s nice to see new car sales back up to where they were pre-recession. If you actually track new car sales and correlate it with population growth, I think the SAAR is still pretty low. So there are lots of different estimates about what’s going to happen over the next year. We are just going to try and do the best job we can based on the conditions that we see.

Great. And then just within some of the pool data we have seen losses, delinquencies, tick-up slightly, just wanted to kind of get your thoughts on where we are in terms of credit availability or things beginning to tighten and how – when rates are moving up, how do you kind of see that impacting both the CAF business and your ability to finance your customers moving forward?

Right, I guess I can only speak specifically to what we have seen through year end. And if you are asking about CAF portfolio where there is nothing going on there that we see that caused us any concern. It’s been pretty much business as usual. With regard to the partners, the reason we have a number of them because we want to keep a broad spectrum of credit available to our customers. We continue to see greater than 96% of customers who submit an application and get some kind of approval in our stores. So the way I would characterize, it’s greater than 90%. The way I would characterized our availability through the fourth quarter is as good as ever. And as Tom mentioned, we pick a long-term perspective with our partners. We would try to be a good partner. We believe we have developed an origination channel that is spirit to others as far as originating loans for new cares, for used card and new cars, use the transparency and the integrity of the channel. It’s proven out in the past that our partners have seen better performance on their pool rigidly out of CarMax than elsewhere. We have seen in the past that they preferred to allocate capital to us when times have gotten tough. And as we look forward, we would hope that our work in our long-term relationships and the integrity of the channel would make it such that we continue to see that kind of preference for CarMax.

I think – does that answer question about availability or...

Yes, I think so. I will hop back and get back in queue.

Okay, thanks.

Your next question comes from the line of John Murphy with Bank of America. Please go ahead.

Good morning. This is Liz Suzuki on for John. Just looking at the different buckets of SG&A, what portion is generally associated with existing stores or just new stores and what is typically comprised by advertising and stock-based comp, just trying I think going forward about how we should think about operating leverage backing out the impact of stock-based comp and new stores openings?

Liz, I don’t know that we have divided it, that we have talked about it that way before. So I am not sure I can answer that. But what – can you ask the question again?

Sure. Yes. I was just thinking about like what percentage of SG&A is generally associated with new stores if you are opening 15 or so per year versus your existing stores and just trying to think about leverage going forward?

Yes, I can’t give you the exact percentage, but – because I don’t have it handy. But there is no doubt that new stores on a per-unit basis are significantly SG&A inefficient compared to existing stores, because they are new, because they have higher advertising expense to start, because they are not mature. So if you think about the newer stores, there is no question that they are much more inefficient from an SG&A standpoint on a per unit basis than the older stores. And when you want – you talk about leverage. We have always talked about while we are growing the business, while we are spending the CapEx that we are spending to build 15 stores a year, we need a few points of comps to leverage SG&A at that growth rate. I don’t know if that provides the color you are looking for.

Yes. Liz, another way to look at it is, if you look back over time and you see the growth in SG&A, around half I mean coming from new stores and the rest is coming from...

Of the growth.

Of the growth itself, yes.

Okay, it’s really helpful. Thank you.

Okay.

Your next question comes from the line of Bill Armstrong with C.L. King & Associates. Please go ahead.

Good morning gentlemen. Just a question about SUV inventory availability, the expectations are that we are going to see more vehicles coming into the market from off lease and other sources as we move through the year and maybe price starts to come down, as you are going through the options, are you seeing any indication of that yet and to what extent can you maybe source maybe a little bit more through consumers, any leverage you may be able to pull there?

I can only comment through February. And SUVs have always been a big percentage of our mix. During the quarter, as Bill mentioned, mid-size and large SUVs were around 24%, roughly a fourth of our sales. I think as I have said before with the high volume of off lease product that means there is going to be a high volume of off-lease product coming back into the market at some point. And I think that there is an opportunity or a chance that, that will create some great deals and some great opportunities to buy, which will allow us to then turnaround and give great deals to our customers. But that’s no different than any segment of our inventory. We are very opportunistic. We turn our inventory very quickly. And we try pass on the best deal we can possibly can to our customers. So it’s still a fourth – it was a fourth of our sales during the quarter. If we see lease volumes, lease turn in starts to pick up, which I would expect they will like they always do when you see such a high percentage of new cars that are leased, we will be the ones that are standing there able to take advantage of that and provide great deals to our customers.

Are you seeing any significant change in the mix that you are sourcing from consumers versus wholesale?

No I mean you know that a lot of – a big percentage that we buy comes directly from consumers and the rest comes from auctions and other. So when you see a 24% mix of SUVs, that’s probably about the same from both.

Okay, thank you.

Your next question comes from the line of Seth Basham with Wedbush. Please go ahead.

Thanks a lot and good morning.

Good morning.

Hi Seth.

My question first relates to the balance between market share and profitability. If you could benchmark your results against the industry according to NADA, well, I appreciate that you gained market share overall for the year. The last couple of quarters it appears that you have lost market share, particularly a benchmark against comparable stores. As you think about balancing that relative to profitability going forward, what do you favor, do you favor maintaining market share or taking a little bit of hit on profitability?

That’s a good question and it’s a tough question. I think to use the word optimal is the way I would go and I am not really sure of what that is. I will tell you, I don’t know where you get your data, but we have never been able to get market share data that was accurate on any short-term window of time. I am not even sure how accurate it is over a longer period of time. It is so fragmented nationally. There is 40 million cars sold annually, roughly a third are sold from customer to customer and it’s very challenging to figure out share. I think just the fragmentation alone makes it very, very difficult. As big as we are and I noted some of those numbers earlier, we are a tiny share of 0 to 10-year-old cars nationally, somewhere in the 2% range. So, I don’t know that focusing on share is the right place to spend your energy, because it’s so difficult to ascertain what share actually is. And again, the business is so fragmented you could be as big as we are and have just a fractional share. Even in the markets that we are in of 0 to 10-year-old cars, we think it’s around 5, but remember too that for us, we self select out of a bunch of inventory that’s included in the denominator. We don’t retail anything over 120,000 miles. So, there is a lot of cars that are 0 to 10-year-old over 120,000 miles. We still make an offer on those cars. We buy them and we sell them through our auction. That doesn’t count a share. But we sold 400,000 cars last year that don’t count in share. They just happen to go through our auctions. So, we are evaluating how to think about this going forward, Seth. So, it’s a very good question. But there is such fragmentation I don’t really know how to think about it.

Okay. I guess…

We are just trying to optimize our sales. We are trying to grow our business. We are trying to comp our stores and deliver a great return for our shareholders.

Okay, fair enough. Just as a follow-up, if you look at your profit per unit, obviously, it declined pretty substantially relative to the last few years on a year-over-year basis. You may see that as noise, but do you see that as a driver potentially to boost your sales going forward and would you be more willing to see further declines in order to boost your sales?

I am sorry, Seth, did you say gross margin?

Gross profit per vehicle.

Yes. I mean, it was down – as I said it was down less than $40 and that’s within our kind of our ability to manage. And as I have always said, we will do what we think is in the best interest of our customers and our shareholders. And I can’t really tell you what we are going to do with margins going forward other than we have been pretty consistent with it over the last several years.

Thank you.

And been able to deliver comps at the same time, so...

Thanks, guys.

Thank you.

Your next question comes from the line of Paresh Jain with Morgan Stanley. Please go ahead.

Good morning, everyone. I had a question about GPU as it relates to source of inventory. When we think about the retail inventory channel, it looks like you probably saw as much from auctions as you do to through in-store places, but the auction channel being a lot – relatively a lot less profitable. So, a lot of this increase in off-lease supply expected to show up at auctions or franchise dealers. Is that a way for you to offset any GPU pressure resulting from it?

Well, a lot of those cars also show up in the auction too remember. So, a lot of customers who are coming off a lease will shop at our store and if we make them an offer that gets them out of their car and makes them a little bit of money a lot of times, because we see a lot of lease trade-ins come to our store in the form of appraisals. So, I can’t give you an exact answer, but what I can tell you is, our percent of cars that we sell, that we retail which we call self-sufficiency has been in the low 30s and it’s been as high as I think the low 50s. And it moves around over time depending on a whole bunch of different variables. And what we have gotten, I think pretty good at, is being able to manage our margins despite the fact that we expect some movement there. So, I can’t predict exactly what’s going to happen when leases – when lease volumes at the auction pick up, but it’s not just lease volumes at the auction. Remember, it’s all these cars coming back into the marketplace in a number of different ways.

Understood. I will get back in the queue. Thank you.

Your next question comes from the line of Rick Nelson with Stephens. Please go ahead.

Hey, guys. This is Nick Zangler in for Rick. Just building off that question, earlier you mentioned that some trucks, crossover SUVs were too expensive to buy last quarter. Are you still finding that to be the case? I mean, obviously, this product category continues to be in high demand. And just given that, are you able to get the truck crossover SUV inventory that you want?

As I said, it’s a fourth of our sales. I mean, it’s a huge chunk of sales. And I would say the answer is largely yes. I talked about it last quarter. I thought it would have had a fractional impact on us and I was mostly focused on larger SUVs that were just very, very expensive, but if you look at the Manheim Index through from then to now, prices have come down a little bit. But we are always going to try to do what we think is the best value for our customers. But I mean, it’s a huge chunk of our sales.

Yes. And given that – but do you attribute any of the traffic decline to having to a lack of truck SUV inventory, I guess?

It’s almost impossible to do that, but I would say no.

Okay. Alright, great. Thank you very much.

Thank you.

Your next question comes from the line of David Whiston with Morningstar. Please go ahead.

Thanks. Good morning. Going back to the off-lease topic for a moment, what about on the dealer side? I know that made a lot more emphasis on trying to retail rather than auction themselves and I know they can’t corner the market, but are you concerned that it could cause you guys to not get quite as much as the overall inventory over the next few year as you normally would in this part of the cycle?

I can only go by what’s happened in the past and it has never inhibited us before.

Okay.

It’s usually the cars are more organized at the auction.

Okay. And going back to an earlier question on online versus brick-and-mortar, I wanted to look at that more from the perspective of these startups like shifts. They compete more in a non-store front test bring the vehicle to the consumer’s home with the sales associate. I am sure you want to stay more in the brick-and-mortar side with an online experience to get, to drive store traffic. But is this format something that you are just kind of dismissing for now, because they are so small relative to you or do you think that’s a type of the experience you would want to offer your customers down the road with a much larger selection?

No, we actually just – we have recently tested home delivery. So, we have done some home delivery on a very small test in the market. We will continue to evaluate it going forward. Anything that we see anybody doing that we think would benefit our customers. We are going to evaluate whether or not it makes sense for us. As I mentioned earlier, the one thing to remember is many, many, many transactions involved the acquisition of the customer’s existing car. Something we are very, very good at and I think it gives us a competitive advantage. Some of these smaller online players are connecting consumer to consumer without actually taking any of the inventory and whether actually you are taking any ownership of the inventory, we actually think having 50,000 cars online is a huge advantage for us in providing a great selection for customers and a multifaceted selection when they get into their finance options and find out maybe that they can’t quite afford the car that they thought. So, I don’t think anybody is in a better position than we are to deliver more and more of the transaction online and/or even delivering to someone’s home than CarMax can, because we have the infrastructure in place. As I said earlier, I am not sure how big a piece of our total sales it will be, but we are going to be in a position to do whatever the customer wants us to do.

Very helpful. Thank you.

Your next question comes from the line of Irina Hodakovsky with KeyBanc. Please go ahead.

Thank you. Good morning, everyone. Congratulations on your retirement, Tom and welcome aboard, Bill.

Thank you.

I wanted to ask you a little bit of a small details question, SG&A expense. You mentioned you were rolling out in your website through the fiscal 2015 it should be fully rolled out by the end of this month. One would imagine it was probably a bit of a headwind to the SG&A cost. Can we expect an improvement as this initiative is finished and can we expect it to maybe even drive a tailwind?

Really, that’s just – Bill talked about the website we designed, that’s one initiative within our spend. We think we can continue to deliver a great value to our customers and continue to deliver our return to our shareholders and invest at the level that we need to make the improvement that we think are necessary to grow the business. So, if there is significant investment in IT? Yes, but there was the last 10 years also and we expect it to be a big investment for us going forward. As we said, we want to make sure we meet the customer where they want to be met. But we think within our big bucket of SG&A spend we can both invest and deliver a good return for our shareholders.

Got it. Thank you.

Your next question comes from the line of Matthew Fassler with Goldman Sachs. Please go ahead.

I am back guys. Thank you for taking my follow-ups. Two very quick questions for you. It looks like your compensation expense per used vehicle unit, even excluding stock-based comp was down a bit, is there any change in comp practices or was incentive compensation a piece of moving the needle there?

There is a number of different things, Matt. I think we had – as you look at this year is a little weaker than last year and so there is less incentive compensation that I have forgotten that, yes.

Any reversals as part of that or just lower accruals over the course of the quarter?

It’s just been a weaker year relative to plan.

Fair enough. And then my second and last question, any change in the stance of your sub-prime providers and the standards that they are bringing to the market change? And I know your traffic is down in some of the lower quality credit regions, but in terms of their willingness if you could kind of the standards that they are upholding as they extend credit, I mean, anything you have seen there?

Yes, Matt. As I said earlier, I can only speak to what we have seen through year end. And we have been happy with the performance of our Tier 3 partners. They have done a great job for us. I would say that their conversion on applications is a little bit down. But if we look at a like type of credit that they are seeing come through the door that their behavior has been very consistent over the course of the year. So, while we may not see them converting as many people, because their offers might be weaker, that’s more of a byproduct of the fact that what they are seeing is weaker than how their behavior has been. And as far as how they go forward, we want them to run a business that’s profitable and sustainable so that they can support our customers and we will keep an eye for the long-term.

Got it. Thank you.

Your next question comes from the line of Rod Lache with Deutsche Bank. Please go ahead.

Hey, guys. Thanks for taking the follow-up. I just wanted to ask on CapEx, you would say that the 4.50, which is pretty meaningful year-over-year increase, has lot to do with timing of land acquisitions and construction activity. How much of the year-over-year increase can we kind of think of as growth in kind of core CapEx versus timing? And then subsequently, should we think about CapEx being down into fiscal 2018?

Yes, almost all of the increase is timing and we would expect to not be aside the following year.

Got it. So, then maybe that same magnitude come back down to sort of where we have been running and...

I mean, we couldn’t give you an exact number, but yes, we don’t expect it to be that number the following year.

Yes, I think remember Rod, these deals take a long time to put together and we had a few of the slips from this year into next year that we would have expected to cost the money up on this year. And if things take longer than expected, you might get concentrated in one year versus the other. And if things accelerate, you find opportunities that you need to close on faster the same could be true, but...

Yes, and I think that because it – we are at this 15ish store year pace, you need to really be working on 60ish pieces of property to deliver that. So, when you get a CapEx number from us, it’s our best estimate of the next 12 months. But as Tom said, there is some timing, there is some shifting back and forth, but this differential between the year that we are telling you about which is the upcoming year compared to last year is almost all timing.

Great. I really appreciate the clarity guys. Thanks.

Yes.

Your next question comes from the line of Bill Armstrong with CL King & Associates. Please go ahead.

Good morning. My question also was on CapEx and you have been able to over time reduce your overall cost of new stores, reducing the footprint through more efficiency. I was wondering if you could just maybe update us on what the trends are there? Are you still able to get maybe little bit less cost on an average per store basis? How should we think about that when looking for CapEx?

The big piece you left out there is the land part of it and that’s not something we really have a lot of control over. But in terms of value engineering our store so that they are both as efficient to build as possible and then as efficient to run as possible, those are the things we are hyper-focused on. But when you look at our openings for the last couple of years and the next couple of years, we are going to do some pretty expensive big metro markets. We have opened Philadelphia, St. Louis and Boston and Denver in the last couple of years. And in the next couple, we have San Francisco and Seattle coming. So oftentimes, in a place like that, the land acquisition price is going to overwhelm the store build in some cases. So, we are really focused on building as efficient as we can, but the answer is I think we are building a more efficient box than we used to, but it’s hard to really discern when you look at the total CapEx.

That makes sense. Thanks very much.

Yes.

Your next question comes from the line of Brett Hoselton with KeyBanc. Please go ahead.

Hey, guys. Just two quick follow-up questions. One, can you provide us with an update of your sub-prime pilot kind of where you are at, do you have a particular direction that you think you are heading at this point? And then secondly, can you provide us with just some very rough examples of where your market share is at in maybe some of your mature markets?

I will take the sub-prime. As I said in my comments and in the release, we continue to be comfortable with where we are at and we are going to continue at the same pace with Tier 3 volume, which is about 5% of the Tier 3 volume that we felt throughout the stores. The sub-prime test, we haven’t learned anything that scares us about it. In fact, we believe it’s a profitable business. But there is more to the equation around risk and what we want to do with the company going forward. So, I think the way to characterize it is it’s going to be – it’s about 1% or less of our total portfolio. But all the reasons that we decided to go into this test are still holding true and we need to continue to get knowledge about this space and these customers and we are going to make sure that we are in a position that we can mitigate risk to the extent we need to. And from that perspective, I think we are comfortable kind of steady as you go.

And I am sorry, your second question was?

So, your overall market share across the United States is 1% to 2%, can you provide us as examples of where your market share might be in mature markets?

Sure. So again, I talked about the challenges around market share, but it’s about 2%. If you look at it nationally which includes the places that were not. It’s about 5% on average. Remember, our 0 to 10-year-old cars and I talked some about the challenges of the denominator. It’s about 5% in the markets that we are in. And it’s between 10% and 15% in our most mature markets. So, it is no doubt that there is a ramping and a growing over time that’s a combination of comp sales and adding stores into new markets. So, we have seen in our older markets that we can be in the double-digits on share of 0 to 10-year-old cars.

Let me ask you maybe just maybe a broader conceptual question. So, let’s say your mature markets you are in the 10% to 15% range, your next competitor I mean to guess is maybe less than 1% of the market. So, it seems as though you, to be blunt, have an impenetrable near monopoly in your mature markets. Would you disagree with that or would you say that look we really feel very strongly that we have got a very, very strong model?

I think we have a very, very strong model. I think monopoly would be a word I wouldn’t use.

That’s fair.

But I mean our average numbers speak for themselves. As I said earlier, our average stores – this is our average, including all of our new stores in the quarter sold about 340 cars a month. The average new car dealer who generally are the next biggest and there is variability by market. There is some places where there is independents that have some significant sales. But generally new car dealers that sell used cars we would consider the next biggest and the average nationally is around 40 or 50 cars a month, so that the size differential is kind of true for us in most places.

Well, again, Tom, congratulations on your retirement. Bill, congratulations. I tell you, Tom, you have built a tremendous franchise here. So, congratulations.

Thank you. And really, I really didn’t do anything. I was along for the ride with a bunch of really great people. And I am still going to be here for a little while longer. So – but listen, that’s all we have today. Thank you guys very much for joining the call and thanks to all of our associates at CarMax for delivering such a great customer experience and we will talk to you next quarter. Thanks.

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